South Dakota and Michigan are the latest states to announce
changes to their state pension systems as a result of lowered expected
investment and funding concerns.
In South Dakota, Gov. Dennis
Daugaard on February 9 signed into law a bill that changed the cost-of-living-adjustment
requirement formula for the $10.5 billion South Dakota Retirement System (SDRS).
Under the new formula, the retirement system’s COLA will not
exceed 3.5% and will not be less than 0.5% a year, provided the retirement
system is 100% funded. However, if the funding ratio falls below 100%, the retirement
system’s board can enact a “restricted COLA maximum” so the funding ratio can
increase back to 100%.
Previously, the South Dakota COLA formula was linked to the system’s
funding ratio. When it was fully funded at 100% or more, the COLA was 3.1%, but
when it was less than 80%, the COLA fell to 2.1%. Between 80% and 100%, the
fund reverted to a formula based on a combination of the funding ratio and the consumer
price index. South Dakota enacted the COLA changes based on an actuarial study
done in November 2016 when the fund’s assumed rate of return
was reduced to 6.5% from 7.25%.
The SDRS also plans changes for its participants
this spring. A bill will enact a new
benefit design for members joining SDRS on or after July 1, 2017. This benefit
design does not impact the one for
current SDRS members. SDRS will continue as one plan with
two benefit designs, according to a release on the SDRS website.
Under the new plan, the retirement age was raised by two
years (from 65 to 67 for judicial, and from 55 to 57 for public safety
employees) and early retirees will face a 5% per year reduction in benefits. In
addition, members who enroll on or after July 1, 2017, will be eligible for a
Variable Retirement Account (VRA) that will include an annual contribution of
up to 1.5% of compensation; credited with South Dakota Investment Council
earnings; available to members at retirement, disability, or death.
These changes were made to address longer life expectancies,
increasing market volatility, and “evolving employer workforce objectives. By
applying the benefit design changes for future members only, legal issues and
retirement planning concerns for Foundation members are avoided,” according to
the SDRS website.
Reduce Assumed Rate of Return
Michigan, the state is assuming a reduced expected return rate for its
retirement plans and has established a taskforce charged with addressing the
unfunded liability for the state’s four retirement plans. A new state budget
proposed this month included more funding to the $55.7 billion Michigan Retirement Systems as a result of lowering the
pension system’s assumed rate of return to 7.5% from 8%.
The goal of reducing the assumed
rate of return, while simultaneously raising state contributions to the four
public defined benefit plans the state administers, will reduce risk and
“remain on track to eliminate the liability entirely by the year 2038,”
according to a statement released by Gov. Rick Snyder.
The unfunded pension liabilities of
the four state retirement systems as of Sept. 30, 2015, (the latest available date)
were $33.2 billion, according to the Michigan
State Office of Budget.
The state’s largest public plan, the
$43.2 billion Michigan Public School Employees Retirement System (MPSERS),
faced an unfunded liability of $26.7 billion. The new lower 7.5% return target
will be implemented over a two-year period for MPSERS, according to the
governor’s proposed 2018 budget.
of Sept. 30, 2015, two of the state’s three pension plans were frozen: the
$10.9 billion Michigan State Employees Retirement System had an unfunded
liability of $5.8 billion, and the $255 million Michigan Judges Retirement
System, with an unfunded liability of $8 million. The $1.3 billion Michigan State
Police Retirement System, which was not frozen, had an unfunded liability of
- By Chuck Epstein
Michigan Reform Too Optimistic?