Indiana Hunts for Outsourced Annuity Provider, Despite Bill to Block It

The public pension's plan for a major risk transfer deal is moving ahead, but so is emergency legislation to derail it.

(January 29, 2014) – The Indiana Public Retirement System (INPRS) has ignored ongoing protests from state legislators and pushed ahead with its plan to outsource the optional annuities it offers retirees.

The $27 billion fund has reissued a request for proposals (RFP) for insurance companies interested in the contract, which is worth roughly $200 million per year, according to the document.

INPRS received submissions from the initial RFP, which was issued in March, the retirement system’s head of communications Jeffrey Hutson to aiCIO. However, subsequent changes to the fund’s actuarial assumptions meant new and more specific parameters for annuity providers’ proposals. The new RFP was released January 21.     

Under the board’s plan, INPRS would continue to provide and administrate members’ core defined benefit (DB) pension. But in addition to the DB scheme, IPRS members pay about 3% of their salaries into an annuity savings account. Upon retirement, roughly half choose to take the balance as a lump sum while the rest use it to purchase an in-house annuity.

In a July 2012 meeting, the board of trustees decided to outsource those annuities.

“The board’s major reason for taking this outside the fund is managing risk,” Hutson said. “As fiduciaries, they asked themselves if using a solid external provider didn’t make more sense. The board decided to reduce risk where they could.”

State lawmakers disagreed. 

A bipartisan group of four house representatives have sponsored a bill to bar INPRS’ board from hiring an external annuity provider for the next five years. Instead of outsourcing, it proposed INPRS price annuities using the pension fund’s actual returns instead of its 6.75% assumed rate of return. This would make annuities affordable for the fund, the lawmakers argued, while saving retirees the additional haircut of private fees. 

The legislation—declared an “emergency” measure—was introduced January 9, and cleared the house employment, labor, and pensions committee with unanimous support on January 27. 

“With privatized control, retirees will lose peace of mind that they can reach out and touch someone in the public employees retirement system who will securely handle payments on their annuities,” said Representative David Niezgodski, a Democrat and cosponsor of the bill. What the board members called “managing risk,” Niezgodski and a number of other politicians have characterized as “dump[ing] their responsibilities.”

“We do understand that there are some concerns people have, which are legitimate for them to raise,” INPRS’ Hutson said. “One is the stability that INPRS provides, and losing that by shifting to someone outside. People trust INPRS. But we are committed to selecting a very solid provider, and we don’t wash our hands of monthly, weekly, and daily oversight.”  

He also noted that INPRS would comply with any legislation passed into law, but is going forward with the plan set by the board.

The bill to ban outsourcing of public annuities has moved on to the House Ways and Means Committee, which has yet to schedule a hearing.

Prospective annuity providers have until February 27 to respond to the retirement system’s RFP.  

Related Content: Indiana Pension’s Outsourced Annuity Plan Rankles Lawmakers; Annuity by Default: The Future of DC?