Banking & Finance and State Government and Investing and Retirement Benefits and Retirement and Government & Economic Development and Government

State pension board postpones decision on annuities

October 25, 2013

State pension officials say they want more information from lawmakers before they consider abandoning a plan to privatize one part of a retirement plan for teachers and public employees.

Members of the Indiana Public Retirement System Board of Trustees said Friday they aren’t sure if they can meet a legislative request that they administer an annuity program – which some retired employees use to stretch their savings through retirement – without creating an unfunded liability for the system.

So the board instructed the agency’s staff to work with the legislative Pension Management Oversight Commission to better understand the request.

One lawmaker – Rep. David Niezgodski, D-South Bend – said he was “disappointed” the board opted to postpone and seek more information.

The annuity is one of a two-part retirement system administered by the Public Employees’ Retirement Fund and Teachers’ Retirement Fund. The system includes a defined benefit plan, which is funded by government and schools for its employees, and a savings account that can be funded by employees or employers.

Upon retirement, the worker can take the savings account as a lump sum, roll it into a different retirement account, or convert it to an annuity to spread its benefits over the length of retirement.

Currently, retirees who opt to annuitize their savings can do so with a 7.5-percent interest rate, which is well above market rates and the amount the state is earning off the money that’s invested. The gap creates an unfunded liability that retirement board members decided was no longer acceptable.

So the group voted in July to use market rates for the annuities – and hire an outside vendor to establish the rates and administer the program.

That drew criticism from retirees and the groups that represent them and lawmakers spent hours last month taking testimony on the issue. The change is expected to reduce annuity payouts to future retirees by an average of $900 to $2,100 annually.

Lawmakers were sympathetic to state officials’ concerns that the interest rate is too high to be sustainable – but not to the idea of hiring an outside administer for the annuities. That’s in part because they believe the move would likely push the annuity interest rate lower.

So the advisory commission voted to recommend that the pension agency keep the administration of the annuities in house while establishing an interest rate that doesn’t create an unfunded liability.

But pension officials have argued that by turning the system over to an outside company, the state shifts the financial risks away from taxpayers and retirees. Keeping the annuity program in house means more risk for both groups, said Jeff Hutson, a spokesman for the pensions agency.

The Public Retirement System Board took up the legislative recommendation at a meeting Friday and opted not to act.

“The board was concerned that annuitizing in-house could create unfunded liabilities,” Hutson said. “So, they instructed staff to work with PMOC members for clarification.”

But Niezgodski said there’s no reason for clarification.

“PMOC’s unanimous decision was not confusing nor was there any conflict to leave any doubt about our intent,” he said. “The trustees must accept their responsibilities to the thousands of employees who have entrusted their futures to the state. It is not the time to dump that responsibility onto private interests whose greatest concern is their company quarterly earnings and profit margins.”

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