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The Safety of Your Pension:A Perspective

Sandy DrewMarch 16, 2012

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Agenda

Summary of WRS Defined benefit (DB) vs. defined

contribution (DC) pension plans WRS -- Something to protect Events in Wisconsin How the system is working Where to secure more information

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Wisconsin Retirement System

Department of Employee Trust Funds (ETF) – Administers benefits for WRS participants

State of Wisconsin Investment Board (SWIB) – Manages and invests WRS assets

WRS = ETF + SWIB

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ETF’s Organization

Teachers Retirement Board Wisconsin Retirement Board Employee Trust Funds Board

Policymaking board Appoints Secretary of ETF Fiduciaries Approves contribution rates

recommended by actuary

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SWIB’s Organization Nine-member Board of Trustees

Six members appointed by Governor One representative of teacher participants One representative of non-teaching participants Secretary of Department of Administration

Fiduciaries Professional investment staff Active management

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SWIB and ETF

ETF – Secretary Robert Conlin Questions regarding all retirement benefits

and insurance benefits for state & UW employees

Any questions re your annuity SWIB –

Executive Director Keith Bozarth until June “ “ Michael Williamson Any questions regarding investment

returns or types of investments

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Defined Benefit (DB) Pensions

Benefit based on years of service, salary & multiplier

Benefit paid for life of employee or spouse

Employers and sometimes employees make contributions to fund benefits

Professionally invested

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Defined Contribution (DC) No promised level of benefits – varies based

on contributions and investment decisions Employer contribution usually dependent on

employee contribution Employee responsible for investment decisions Costs to invest DC plan about twice those of

investing DB plan assets Investment responsibility shifted from

employer to employee No assurance benefits sufficient to meet needs

until death

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Key Features of WRS

Consolidated – includes nearly all public employees, with exception of Milwaukee City & County

Defined benefit (DB) plan that provides benefits until death

Defined contribution (DC) plan as investment risks & rewards shared

Provides financial security with modest benefits

Fully funded

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Shared Risks & Rewards

Employee-required and employer-required contributions

Contribution rates set by ETF Board Participants share in investment

gains and losses Annuity benefits = contributions

paid while active employee + investment earnings

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Few WRS Facts

Over 570,000 participants 12% of state’s population – nearly 20%

with dependents Two Funds

Core Trust Fund – All participants, diversified investments, gains & losses smoothed

Variable Trust Fund – Optional, all-stock fund, no smoothing of gains & losses

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Few WRS Facts (cont.)

167,649 annuitants as of 12/31/11 $4.2 billion paid in annuities in 2011 Monthly annuity averages about $2,000

per month Nearly 90% of annuitants continue to call

WI home ETF & SWIB low cost to administer

benefits & invest funds compared to peers

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Sustainability of Public Funds

Can public pension funds pay promised benefits?

Some plans in difficult financial straits before 2008

Collapse of financial markets in 2008 affected all funds

Some require significant funding increases

WRS weathered situation better than others – only modest contribution increases

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Effect of Last Year on the WRS

Legislature and Governor Repealed law that allowed

employers to pay employee-required contributions Employees now pay ½ of all required

contributions Increased hours to be eligible for

WRS coverage Require 5-year vesting to be eligible

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Other Legislative Actions

Study of the WRS to address Effect of establishing a DC plan for new

hires Allow new hires to “opt out” of paying

contributions to WRS Create optional retirement plan

(OPR) for UW System new hires Limit ability of annuitants to be

rehired by public employer

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Study

To be completed by Department of Employee Trust Funds, Department of Administration and the Office of State Employment Relations

ETF spearheading the study Study to go to Governor and

legislative committee by June 30, 2012

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Inherent Dangers

Permitting employees to opt out or not pay contributions will Weaken the entire system Create volatility in contribution rates Reduce the pool of money to invest &

subsequently affect investment strategies

Creating DC plan transfers risk to employees & further weakens current system

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Retirement Security Major Concern for Workers*

Last 30 years shift to lower income jobs Private sector workers covered by

employer DB plan fell from 28% to 3% 51% of working-age households at risk of

falling short of pre-retirement living standard

Median retirement account balance value $45,000 in 2007

81% say all Americans need pension for independence, self-reliance

*National Institute on Retirement Security report to Joint Retirement Boards March 2012

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Policy Question

Should we as a society . . .

Weaken or destroy a system that works?

Work to achieve financial security independence in later years for everyone?

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Wisconsin Pensionomics*

In 2009, expenditures from WI state and local pensions supported. . .

50,317 jobs that paid $2.0 billion in wages & salaries

$6.2 billion in total economic output $856.7 million in federal, state &

local tax revenues*National Institute on Retirement Security report to Joint Retirement Boards March 2012

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Wisconsin Pensionomics (cont.)

Each $1 paid in pension benefits supported $1.49 n total economic activity in Wisconsin

Each $1 “invested” by Wisconsin taxpayers in these plans supported $6.22 in total economic activity in the state

*National Institute on Retirement Security report to Joint Retirement Boards March 2012

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SWIB Investment Returns*

1-Year 5-Year 10-Year

Core Trust Fund 1.4% 2.3% 6.0%

Core Fund Benchmark

0.9% 2.3% 5.9%

Variable Trust Fund -3.0% -0.7% 3.7%

Variable Fund Benchmark

-3.6% -0.8% 3.9%

Russell 3000 1.0% 0.0% 3.5%

* As of 12/31/11 per SWIB website

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2012 investment return from 27%-31% needed to avoid a negative adjustment*

2011 2012 2013 2014 2015 2016

SWIB Net Investment Return 1.4% 27% to

31% 7.2% 7.2% 7.2% 7.2%

Effective Rate 1.5%5.2%

to 5.6%

12.9% to

13.3%

11.0% to

11.4%

10.3% to

10.7%

11.2% to 11.6%

Average Annuity Adjustment -4.0% 0% 5.8% to

6.2%4.7% to

5.1%

4.1% to

4.5%

4.9% to

5.3%

Maximum Annuity Adjustment -7.0% 0% 5.8% to

6.2%4.7% to

5.1%

4.1% to

4.5%

4.9% to

5.3%

*ETF March 2012 Report to Joint Retirement Boards

Core Trust Fund

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Approximately 71,521 annuitants and 47.5% of annuities were not subject to the full negative annuity adjustment in 2012

Annual Annuities by Year of InceptionAfter (7.0%) adjustment

As of December 31, 2011

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Now what??? 4%-7% reduction not what anyone wants,

but . . . We will continue to draw a monthly

pension that equals or exceeds our initial annuity.

Reductions show that the system works. It has withstood the worst financial markets since Great Depression.

But, vigilance is critical so system is not weakened!!!

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What can you do?

Contact your legislator – hands off the WRS.

Keep abreast of what is happening Differentiate facts from fiction Quiz future candidates about their

positions on benefits for public employees

Access ETF & SWIB websites for info

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Sources for Information

Department of Employee Trust Funds http://etf.wisconsin.gov

State of WI Investment Board www.swib.state.wi.us

National Institute for Retirement Security www.nirsonline.org