TEXPERS: Texas Pension Systems in Better Health with Lower Target Rates

More Texas pension funds have moved to reduce their assumed rate of investment returns in the past six years, according to the Texas Association of Public Employee Retirement Systems (TEXPERS), thereby improving their health. In 2011, 19 of 52 Texas pension fund systems, or about 36%, reported an assumed rate of return of 8% or lower. In 2016, 61 of 78 pension fund systems, or 78%, reported the same. TEXPERS conducts an annual survey of its more than 80 members.

Combined with a six-year trend to improved amortization periods for Texas pension systems, TEXPERS expects that the move to lower target rates of return puts the Texas pension systems in better health. While a higher target rate for investments would understate pension systems’ liabilities and call for a lower contribution from public employees and their employers to pay out promised pension benefits, the targeted returns could be unrealistic and goals may not be met. Higher return targets could also force the pension plans to take on more risk.

And though setting a lower target rate of return could help cut risk, it also will overstate the plan’s liabilities and will likely mean larger contributions from the employers and workers. The ideal target rate is one that employers, employees and pension funds find amenable, keeping in mind budget realities and risk tolerances.

“We continue to hear criticism that pension funds set unrealistic rates of return and take unnecessary risk in the low-interest-rate environment we’ve had the last 10 years,” noted Max Patterson, executive director of TEXPERS. “The facts indicate that not only are pension systems reducing their expectations but also managing benefits levels and investments in a responsible manner. These facts directly contradict what opponents to defined benefit plans say about target rates and the sustainability of the pension systems.”

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Politically, those who are against defined benefit plans believe that pension plans that have set their assumed rates of return at higher than 8% hide the extent to which they are underfunded, and also cause the system to take on too much risk. There are those who argue that lowering the assumed rate of return to reveal the extent of a system’s pension underfunding would cause it to opt for defined contribution plans instead of defined benefit plans.

According to TEXPERS, these are not valid arguments, given that Texas pension systems have been lowering their target rates of return, based on expectations for lower investment returns. Even with these lowered returns, the improvements in their amortization periods mean that there hasn’t been a negative impact on their ability to meet their obligations.

Tags: investment returns, Texas Association of Public Employee Retirement Systems (TEXPERS), Texas pension funds

The New York State Teamsters Conference Pension & Retirement Fund has withdrawn its application seeking approval from the Treasury Department to reduce its benefits under the Multiemployer Pension Reform Act (MPRA).

The fund’s board of trustees made its decision based on communications from the Treasury Department suggesting that its application would be denied, according to Tom Baum, the fund’s retiree representative. As the retiree representative, Baum is an advocate for the interests of retired and deferred vested participants, and beneficiaries of the fund.

Baum said the fund will submit a new application as soon as possible, and that the Treasury Department has indicated that it would expedite its review. He also said that the Treasury Department’s concerns about the original application centered on the plan’s short- and long-term investment return assumptions, and its mortality assumption.

The Treasury questioned why the short- and long-term investment return assumptions of 6.75% and 7.5% respectively differed from the higher rates suggested by a survey of investment managers. The Treasury requested a detailed explanation of how these percentages were determined. Because of this, investment return assumptions higher than 6.75% and 7.5% may be used in the new application, Baum said. He also said that if the fund uses a higher return assumption, it could help to prevent deeper benefits cuts. However, he added that the Treasury has not specifically said what assumptions it wants the fund to use.

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In its original application, the fund had proposed a 20% reduction in monthly benefits for all active participants, and a 31% reduction in monthly benefits for all retirees, beneficiaries, terminated vested participants, and all other non-active participants. Had the application been approved, the cuts would have gone into effect July 1. Baum said the fund expects that the cuts proposed in its new application will go into effect on October 1, if approved.

According to Baum, the fund had previously said that cuts in a new application would be greater than 31%, because its fiscal condition was expected to deteriorate significantly between the effective date of the first application, and the effective date of a later application.

“But there is some reason to hope that the cuts under the new application will not actually be deeper,” said Baum on his website. “The fund’s investment earnings during the last few months have been better than expected, which could help make deeper cuts unnecessary. It’s still possible, however, that the new proposed cuts will be deeper than 31%.”

Tags: multiemployer Pension Reform Act, New York Teamsters, Treasury