(July 11, 2013) — Following last year’s GM and Verizon pension fund buyouts, Republican Senator Orrin Hatch of Utah has tabled a bill asking for the federal law to be changed to allow public sector pension funds to obtain buyouts too.
Speaking at the Senate on July 10, he told fellow senators that US state and local funds collectively owned a $4.4 trillion deficit, and that the problem was getting worse.
“A new public-pension design is needed: one that provides cost certainty for state and local taxpayers, retirement-income security for state and local employees, and does not include an explicit or implicit federal government guarantee,” Bloomberg reported him saying.
Unlike a traditional buyout, under Hatch’s plan the annuitization of the benefits would be done in yearly tranches, which would require an annual competitive bid process. The Secure Annuities for Employees, or Safes, would also be portable, following workers from job to job.
Insurers, as you may have expected, are open to the idea. A spokesman for MetLife told aiCIO: “MetLife has been focused on the retirement income crisis for a number of years and applaud Senator Hatch for recognizing the importance of guaranteed streams of income in retirement that people can’t outlive. We appreciate the Senator furthering the retirement security debate in this multifaceted way.”
However, Prudential–the insurer partner for both GM and Verizon’s buyout in 2012–was more muted. Its spokesman offered: “The bill has not yet been introduced. We will review when it is and as a result, will not be making comment on this issue at this time.”
Pension CIOs were similarly hesitant to the idea, knowing that as ever, the devil will be in the detail.
Al Sampers, the former chairman of the Virginia Retirement System, said his initial, “off-the-cuff” assessment was that an insurer partner was only one option, and that there was nothing to stop encouraging staff to buy their own annuities, without turning over the whole state program.
Other strategies, such as simply matching liabilities, could also work.
“I am not sure that politicians would welcome the certainty of a fixed contribution that would have to be legally required in order for it to work,” he added.
“It would be fine during good times, but the ability to hold back contributions during periods of declining municipal revenues is too enticing a budget-balancing tool to give up.”
But by far the biggest hurdle to overcome would be the cost outlay. Several of the CIOs aiCIO spoke to cited this as their major concern.
Gary Findlay, executive director at the Missouri State Employees Retirement System, said the introduction of insurance products with embedded fees, a margin for profit, and contingencies for longevity and investment risk–not to mention guarantor premiums and lower probable investment earnings–would add a layer of costs to the process and reduce assets available for benefits.
“That boils down to either providing the current level of benefit at higher costs, or providing a lower level of benefit at the current costs. While I’m sure there will be efforts to obfuscate this with rhetoric, it really is that simple,” he added.
Donald Pierce, CIO of the San Bernardino County Employees’ Retirement Association, was of a similar persuasion.
“Broadly speaking, the ability to off-load the pension liability to a life-insurance company typically takes a significant premium over the existing asset to liability ratio, say 113% to 117% or so,” he said.
“Moreover, the portfolio typically needs to be significantly invested in bonds to accomplish the transfer to the insurance provider. Therefore for a host of reasons, one wouldn’t expect this solution to be available to most public funds.”
And even if you assume a buyout was a useful tool, the decision to make that transfer would be made at the sponsor level, not by the pension funds, he added.
One buyout expert, who asked not to be named, also raised the question of what safety net there would be for members if the buyout insurer fell into insolvency.
“Currently, private companies have the PBGC if their sponsor fails, but if a state pension fund was to fall after being transferred to an insurer, what protection would they have?,” they asked.
“If you have an annuity with an insurer in the US and they go bust, the support you receive would be reliant on which state you reside in, not where they’re regulated. So if you’re living in California which is close to bankrupt, you won’t be happy about that will you?”
The source also agreed with Findlay that an insurer buyout was not “a magic bullet”, and that insurers would not be able to offer a cheap deal.
“You’d have to couple it with a cut to benefits to make it affordable,” they added. “I’m not sure that would be affordable or desirable for the State.”
Is it a bill allowing private sector interests to get their hands on billions of public sector dollars? You decide.
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