NCPERS Study Highlights Economic Costs of Doing Away with DB Plans

Weighing in on the rising trend towards doing away with defined benefit pension plans, a study by the National Conference on Public Employee Retirement Systems (NCPERS) highlights the costs to the economy that will result by 2025 from the disappearance of these plans.

According to Michael Kahn, director of research, NCPERS, “A great deal of criticism of public pensions is based on a faulty understanding of how long-term liabilities are funded. Opponents of public pensions tend to whip up fear by arguing that cities and states can’t cover their long-term pension liabilities with current revenues. That’s like saying your 30-year mortgage is in trouble if you can’t pay it off from this year’s salary.”

Pensions help stimulate the economy, considering that they are a major source of income for retirees. Pension assets also provide capital for businesses. Defined benefit plans provide a $1.2 trillion stimulus to economic output, the public pension funds’ trade association reports.

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The study’s findings include:

Total personal income in the US would drop off by about $3.3 trillion by 2025 in the absence of these plans.
Economic growth would fall off to 3.29% by 2025, from a potential 4% growth.
As various states minimize their defined benefit plans, they are likely to see income inequality rise by 15% over a 10-year period. In turn, that will cut into the rate of economic growth by almost 18%.

According to NCPERS, a lot of the criticism of these plans is exaggerated, and they are doing better than politically motivated commentary would indicate. There are other ways to fund public pensions without doing away with them entirely, and some states are considering such alternatives.

One such approach is asset monetization, considering that state governments have assets that can provide a steady cash flow to finance pension obligations. They could sell or lease such assets to generate the money to match their long-term pension liabilities. For instance, Allentown, Pennsylvania, generated $211.3 million by leasing its water utility for 50 years, using $160 million of this inflow to offset its pension liabilities.

“The facts clearly demonstrate that the vast majority of professionally managed defined benefit public pension systems are adequately funded, are sustainable by implementing common-sense policies, and benefit the economies of communities and states,” noted Hank H. Kim, executive director and counsel, NCPERS.

He added, “Our nation faces a growing retirement crisis that has been exacerbated by the inability of defined contribution plans such as 401(k) plans to provide a reliable income stream during retirement. Defined benefit public pensions, with their reliability and superior cost management, should be a model for the private sector.”

Tags: asset monetization, criticism, NCPERS, Pension

Exxon Mobil shareowners can now breathe a sigh of relief knowing that climate change reports will become more extensive following the results of a proxy vote at the company’s Annual General Meeting.

Anne Simpson, CalPERS investment director, sustainability, told CIO, “I think that what this is demonstrating is that we’re increasingly in a world where the shareowner proposals are not treated as some test of loyalty to management of the company. They’re being scrutinized as to value they might bring to the investors in the company and I think that’s very important.”

The resolution, known as Proposal #12, requires the company to report on issues concerning climate change. It was passed in a 62.3%% vote by shareowners—a move that Exxon’s board of directors recommended they vote against.

“It’s very unfortunate that the board of Exxon opposed the proposal,” Simpson said. “However, what’s encouraging is that the major asset managers and asset owners have viewed the proposal on merit. It’s all the more baffling that Exxon should have chosen to oppose it, because to their great record, the company is in support of the Paris Agreement. We all have found out in recent weeks [about] the company’s written letters, not once, but twice to the White House, calling for the US to stay in the Paris Agreement. I think that a cold-blooded financial analyst would say, “if you support this policy framework, which is going to transform the energy sector, then we ought to have the risk-reporting to go with it. Otherwise it’s a cart with no horse.””

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Proposal #12 was co-filed by CalPERS and a collection of other investors, which includes the Church of England and the New York State Common Retirement Fund.

“We’re so long-term, we’re virtually permanent investors,” said Simpson. “We’re looking ahead decades for the liabilities that we’re investing to pay pensions for, and for that reason, this scenario—also the Paris Agreement—are extremely important to us, not just for risk-management, but also for the opportunity that they’re bringing for all the energy companies.”

The now-greenlit proposal requires Exxon Mobil to asses their portfolio under the “2 Degree Scenario.” This will be added to not only existing reports analyzing climate change-related impacts on and gas reserves under the globally agreed upon 2-degree target, but will also examine the long-term impacts of technological advances (such as carbon capture) and global climate change policies. The proposal will also examine the resiliency and financial risks of Exxon’s portfolio through 2040, and beyond.

“Because we’re a global investor, we want to be able to track and understand where risk and where opportunity lie—not just in the US, but in the other markets where we have capital deployed within the energy sector. I think it shows investors are standing on their own two feet making their mind up, rather than simply following the lead of management, Simpson said. “We’ve seen them talk the talk. We want them now to walk the walk, so maybe this vote’s going to help nudge them in that direction.”

Tags: CalPERS, ExxonMobil, proposal #12