A legislative panel will consider asking state officials to back off a plan to privatize public employee retirement benefits and reconsider significant cuts to the rate of return on their annuity investments.
The Pension Management Oversight Commission can’t tell the administrators of public employee and teacher retirement accounts what to do, but after 90 minutes of public testimony Monday against the changes already underway, lawmakers said they can urge officials at the Indiana Public Retirement System to reevaluate.
“It certainly seems like a little extra work could be done on this,” said Rep. David Niezgodski, D-South Bend. “This has been an extremely quick rush to judgment. What is the harm in waiting? Otherwise, it smacks of injustice.”
At issue is a decision the Indiana Public Retirement System Board of Trustees made in July to use an outside vendor to administer annuities that retired workers can use to turn lump sum payouts into monthly benefit checks. That private vendor could then base future retirees’ benefits on market-based rates, rather than using the current 7.5-percent interest rate.
The change is expected to reduce annuity payouts to future retirees by $900 to $2,100 annually.
Nancy Guyott, president of the Indiana State AFL-CIO, said the changes being implemented by the state will cause an “unneeded reduction in returns on what are very modest retirement incomes.”
State pension officials say they have little choice. They argue the 7.5-percent payout is unsustainable and puts the viability of the pension program in jeopardy.
Tony Green, chief council for the pension board, said the agency doesn’t have the expertise to continually set market rates. That’s why the board is seeking to hire an outside company to manage the annuities, he said.
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 or convert it to an annuity to spread its benefits over the length of retirement.
Dan Doonan, labor economist, research and collective bargaining services for the American Federation of State, County & Municipal Employees, said the state should focus on “experience-based annuities.”
“We should base the annuities on the last 10 years of returns instead of trying to predict the future returns we will get a better plan for the annuities,” Doonan said.
And critics of the state changes said more retirees might opt for the lump sum, rather than take the chance with lower returns. That could lead to poor decisions that leave them financially unstable.
Sally Sloan, a lobbyist for AFT, formerly the American Federation of Teachers, also said that state officials expect teachers and other public employees to be “highly qualified.” But she said a key to recruiting and retaining that type of employee is good retirement benefits.
“We believe this is detrimental, she said.
Sloan also said the window for employees to retire under the current system should be extended. Currently the state has set the new system to take effect for employees who retire after Oct. 1, 2014.
“People don’t make the decision to retire one year before,” he said. “They plan that out for seven to 10 years.”
Bill Murphy, president of the Retired Indiana Public Employees Association, said government pays about 11 percent into the defined pension benefit for employees. Then some employers pay in another 3 percent for the savings account. He said some of those employers may decide against paying that extra 3 percent for employees if they don’t believe the payouts make the benefit worthwhile or competitive.
Sen. Karen Tallian, D-Portage, proposed that the Pension Management Oversight Commission make a recommendation that the pension board keep the annuity management in house, rather than hiring a private vendor. The recommendation would be part of the commission’s final report, which is prepared before the end of the year.
Tallian’s recommendation would also urge the agency to set interest rates that are sustainable, acknowledging that – for now – would be less than 7.5 percent.
Commission Chairman Phil Boots, R-Crawfordsville, said the group will vote on that proposal next month.