Christine BaileyNew York City Board of Education Retirement System

Public Pension Assumed Rate of Return& Pension Deficits:

New Ideas?New Solutions?

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Traditional Defined BenefitPublic Pension Plans

• Misunderstood Institution– Efficient, recent NIRS study shows that the cost to

a given level of benefit id 46% lower in a DB plan that it is in a DC Plan.

– Self-funded by employee and employer over the working life of the participant.

– Pools risk to provide “longevity insurance”, greater diversification and superior returns.

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BERS

• Average Benefit is $11,874.• Funding Ratio – 58%, last year 100%.• Causes– Reduced Actuarial Interest Rate (AIR) to 7% from 8%.– Actuarial Asset Value Restart in FY2010. That means we

eliminated the smoothing of all prior profits and losses and recognized them immediately.

– 20% increase in membership as a consequence of legislation establishing new tier.

– Changes in the actuarial assumptions and methods.

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The Good

• Established an Initial Unfunded Actuarial Accrued Liability with a Payment Period and Method.

• Amortize Losses and Gains over 6 Year period.• Reduced the AIR• Increased Employer Contributions.• Established New Benefit Tier for incoming

participants – Downward adjustment in benefit formula, increasing the Normal Retirement Age and increasing vesting time requirements.

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The Bad

• The sins of the few are superimposed on the many.– Failure to identify Interference with the proper

management of the pension fund.– Acknowledge that 2008 was a fiscal anomaly and

an unfair time to critic underfunding.– Some Pension funds are mismanaged.

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The UglyReplace DB with DC

• Matching Employer Contributions not required.• Plan Sponsor is not required to provide sufficient information

to make informed decision. • Selection and Monitoring up to the individual.• Participants have to be their own Actuary, Investment

Manager and Legal Counsel.• Crash courses in financial literacy only increase confidence

without improving ability leading to worse decisions.• DC Plan Participants have not amassed adequate savings for

retirement.

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Other Ugly

• Filing for Bankruptcy to obtain relief from pension liabilities.

• Pension Holidays – underfunding a pension fund will result in an underfunded pension fund.

• Repeatedly enhancing participant benefits and funding the enhancements through high-risk investments.

• Lowering AIR without increasing Employer Contributions.

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Other Ugly

• Overly optimistic Actuarial Assumptions.• Attempting to scale back vested benefits.• Making pensions negotiable.• The other two legs of the stool, private savings and

social security remain wobbly.

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Conclusion

With prudent management, which includes adequate contributions, appropriate investments, and governance that is

transparent, there is no reason that public pension plans cannot continue to meet their

long-term liabilities, ensuring retirement income for millions of retired public workers.

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