Legislature(2025 - 2026)SENATE FINANCE 532
04/07/2025 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Department of Administration, Division of Retirement and Benefits – Defined Contribution Account Performance | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 57 | TELECONFERENCED | |
| += | HB 56 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
April 7, 2025
9:10 a.m.
9:10:33 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:10 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Mike Cronk
Senator James Kaufman
Senator Jesse Kiehl
Senator Kelly Merrick
MEMBERS ABSENT
None
ALSO PRESENT
Kathy Lea, Director, Division of Retirement and Benefits,
Department of Administration.
PRESENT VIA TELECONFERENCE
David Kershner, Actuary, Arthur J. Gallagher and Company.
SUMMARY
SB 57 APPROP: CAPITAL/SUPPLEMENTAL/FUNDS
SB 57 was SCHEDULED but not HEARD.
HB 56 APPROP: SUPPLEMENTAL; FUND CAP
HB 56 was SCHEDULED but not HEARD.
PRESENTATION: DEPARTMENT OF ADMINISTRATION, DIVISION OF
RETIREMENT and BENEFITS DEFINED CONTRIBUTION ACCOUNT
PERFORMANCE
9:11:23 AM
AT EASE
9:11:43 AM
RECONVENED
^PRESENTATION: DEPARTMENT OF ADMINISTRATION, DIVISION OF
RETIREMENT and BENEFITS DEFINED CONTRIBUTION ACCOUNT
PERFORMANCE
9:12:16 AM
KATHY LEA, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, introduced herself and
discussed her background. She relayed that she had worked
in the division for 34 years and had worked in an executive
position for 22 years. She discussed a presentation
entitled "Funding Status Update: Public Employees'
Retirement System (PERS), Teachers' Retirement System
(TRS)," (copy on file).
9:12:58 AM
Ms. Lea looked at slide 2, "Defined Benefit vs Defined
Contribution, which showed a comparison of factors between
the defined benefit (DB) and defined contribution (DC)
plans:
Defined Benefit (DB) plan
• Is defined in the sense that the benefit
formula is defined
• Employer contributions (Normal Cost and Past
Service payment) will fluctuate annually based on
the actuarial valuation*
• Benefit calculated on set formulas such as the
multiplier (percentage), salary history, and
duration of employment
• Provide a guaranteed benefit for employees at
retirement based on the formula. Inflation-
protection is also provided vis PRPAs
• Benefits can be paid as monthly payments for a
lifetime
Defined Contribution (DC) plan
• Is defined in the sense that the contributions
are defined
• Contributions are maintained in an individual
account
• These contributions are invested on the
employees behalf
• Provide an account balance that will fluctuate
due to the changes n the value of investments;
the employee will ultimately receive the balance
in their account based on contributions plus or
minus investment gains or losses
• Benefits can be a lump sum, rollover to another
retirement plan, or conversion to annuity
payments
* Actuarial valuation: A retirement plan estimates a
plan's financial position at a specific point in time.
Ms. Lea expounded on the comparisons between the two plans.
9:16:11 AM
Ms. Lea spoke to slide 3, "Contribution Rates," which
showed tables of contribution rates for Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) as well as for the Supplemental Annuity Plan (also
known as the Supplemental Benefits System (SBS)):
PERS: Defined Benefit Tier 3
Employee
7.50 percent Peace Officers/Firefighters
6.75 percent All Others
9.60 percent School District Alternate Option
Employer* - Normal Cost & Past Service Cost
PERS: Defined Contribution Tier 4
Employee 8 percent
Employer 5 percent
TRS: Defined Benefit Tier 2
Employee 8.65 percent
Employer* - Normal Cost & Past Service Cost
TRS: Defined Contribution Tier 3
Employee 8 percent
Employer 7 percent
Supplemental Annuity Plan (Supplemental Benefits
System (SBS)) not included in illustrations
Employee 6.13 percent
Employer 6.13 percent
* Effective July 2008, total employer contributions
are 22% for PERS Non-State employers and 12.56% for
TRS employers. Under SB 55 effective July 2021, PERS
State-as-Employer contributes the full actuarial rate
based on the payroll of its employees.
9:18:25 AM
Co-Chair Stedman mentioned that there would be an upcoming
presentation on the Supplemental Annuity Plan and the
issues surrounding the states successful replacement of
Social Security.
9:19:35 AM
DAVID KERSHNER, ACTUARY, ARTHUR J. GALLAGHER AND COMPANY
(via teleconference), noted that he would not be
controlling the slide presentation.
Co-Chair Stedman requested that the presenter communicate
which slide he was speaking to and to pause for questions.
Mr. Kershner referenced slide 4, "Comparison."
What are we comparing?
o DB Plan provides monthly benefits based on pre-
defined formulas, including Postretirement
Pension Adjustments (PRPAs) based on annual
changes in Anchorage Consumer Price Index (CPI);
Alaska residents also receive 10% Cost Of Living
Adjustments (COLA) (applied to their base
benefits), but these COLAs have been excluded
from the illustrations
9:23:28 AM
Mr. Kershner continued to discuss slide 4:
o DC Plan account balance will fluctuate due to
changes in the value of the investments; amount
of annuitized benefit also depends on the
interest rate at the time of annuitization, in
addition to other factors as determined by
insurers
• Is it a true or fair comparison?
o These comparisons are illustrated based on DC
account balances assuming two alternative rates
of return (5% and 7%), and assuming an average
interest rate for annuity conversions; the DC
account balances and annuity conversions are
sensitive to these assumptions
o These illustrations compare the DB single life
annuity with a single life annuity that could be
purchased with the DC account balances at
retirement; DB and DC members could elect to
purchase an annuity other than a single life
annuity, but the amount of the annuity would be
different than what is illustrated
o The same assumptions are used for both DB and
DC to assist in making comparisons; other
assumptions could be used and would produce
different results
9:26:39 AM
Mr. Kershner turned to slide 5, "Formulas and Assumptions":
• Defined Benefit Plan Formulas:
o PERS Peace Officers/Firefighters Tier 3
o [(2.00% x service up to 10 years) + (2.50% x
service > 10 years)] x 3-year average salary
o PERS All Others Tier 3
o [(2.00% x service up to 10 years) + (2.25% x
next 10 years of service) + (2.50% x service
> 20 years)] x 5-year average salary
o TRS Tier 2
o [(2.00% x service up to 20 years) + (2.50% x
service > 20 years)] x 3-year average salary
• Assumptions and Common Variables:
o Hire age = 25
o Salary at hire = $60K with 2.75% annual salary
increases o Retirement ages: 50, 55, 60 and 65 for
PERS Peace Officers/Firefighters and TRS; 55, 60 and
65 for PERS All Others
o Annual inflation (CPI) for PRPAs = 2.50%
o DC account balance annual rate of returns (ROR) = 5%
and 7%
o DC annuity conversion interest rate and interest
rate for DB present values = 3.74% (based on 30-year
average of 10-year constant maturity Treasury yields
1995-2024)
o Life expectancy based on unisex (50% male/50%
female) Pub-2010 General Retiree table with MP-2021
mortality improvement scale
9:31:27 AM
Mr. Kershner solicited questions on slide 5.
9:31:53 AM
Senator Kiehl wondered why the age of 25 had been chosen as
the average hiring age.
Mr. Kershner responded that 25 felt like a reasonable
representative age.
Co-Chair Stedman asked whether Ms. Lea had anything to add.
Ms. Lea believed the age had been used in prior comparisons
had been used here for continuity.
Senator Kiehl asked about the average salary at hiring.
Ms. Lea noted that the number had been used in prior
comparisons and had been used here for continuity.
Mr. Kershner relayed that when projections were run an
assumption had to be made for future hires. He continued
that that a new entrance profile was created based on
various factors. He said that starting salaries differed
but for simplicity the $60,000 number was used. For the
three groups, PERS Peace Officers/Firefighters starting
salary was higher than $60,000, TRS tended to be above
$60,000, and PERS All Others was generally at $60,000.
9:35:22 AM
Senator Kaufman looked at slide 5 and asked about the
three-year and five-year averages for high salaries. He
asked what window of time those averages were drawn from.
Mr. Kershner relayed that the window as the last three-
years or five-years before retirement.
Co-Chair Stedman asked whether Mr. Kershner was using a
linear growth of salaries. He pointed out that some
employees three- or five-year highs might not be during
their last years of employment.
Mr. Kershner relayed that for calculation purposes a 2.75
percent salary increase, per year, was assumed, which would
result in the last three- or five-year wage as the highest.
Senator Kaufman wondered whether the average highest years
could include overtime and be reflective of the actual
linear increase.
9:37:39 AM
Mr. Kershner considered slide 6, "Observations
• The DB plans offer guaranteed lifetime income to
members; post-retirement survivor benefits can be
elected by the member, but the amount of the annual
benefit would be less than what is shown in the
exhibits
• The DB plans also provide inflation protection via
the PRPAs; this can be seen by the increases in the DB
benefits at 10 and 20 years after retirement; the
inherent value of the PRPAs is reflected in the
present value of the DB benefits
• Alaska residents also receive 10% COLAs based on
their base benefits (excluding PRPAs); these were not
included in the illustrations
• DC benefits at retirement largely depend on two
factors:
o DC account investment earnings based on the
member's investment elections
o If annuitized, the prevailing annuitization
interest rates (and other factors as determined
by insurers) can affect the amount of the
annuitized benefit; for example, lower interest
rates result in lower annuitized benefit amounts
(and vice versa)
• PERS DC members contribute more over their careers
than PERS DB members; the opposite is true for TRS
9:41:52 AM
Co-Chair Stedman asked Mr. Kershner to refrain from using
acronyms.
9:42:22 AM
Mr. Kershner displayed slide 7, "PERS Peace
Officers/Firefighters," which showed tables comparing the
Tier 3 (DB) versus Tier 4 (DC). The slide offered 4
different scenarios depending on retirement plan. The first
three blocks showed common items for both DB and DC
participants. He shared that the slide showed the assumed
retirement age, years of service at retirement, and salary
at retirement. He clarified that the salary at retirement
was not the average salary. He said that a $60,000 salary,
starting at age 25 under the PERS system and retiring at
age 50 with at 2.76 percent annual increase, would result
in a retirement salary of $118,222. He said that
determining the defined benefit would require taking the
average over the previous four years of the retirement
salary. He noted that each of the four boxes on the slide
showed the annual benefit at retirement, annual benefit at
10 years after retirement, annual benefit at 20 years after
retirement, present value of benefit at retirement, and
total employee contributions, for both the DB and DC plans.
He discussed the projected benefit payments under the four
scenarios in each box.
9:47:31 AM
Mr. Kershner noted the footnote on the slide, the present
Value of the DB benefit includes future PRPAs. The present
Value of DC benefit does not include future increases. If
the DC member were to use the accumulated account balance
to purchase an increasing annuity, the amount of the
initial benefit would be less than what is shown in this
exhibit.
Mr. Kershner continued to address the tables on slide 7.
9:50:55 AM
Co-Chair Stedman asked how to deal with the unfunded
liabilities that accumulated, and how that was factored
into the scenarios.
Mr. Kerchner relayed that on the DB side, assets were not
allocated to participants because there was one pool of
assets withing the pension trust and one within the
healthcare trust. The projected calculations and
liabilities were done individually for all active and
inactive in the plan, and then summed up as a group. That
number was then compared with the invested assets, which
determined the unfunded liability.
9:52:37 AM
Mr. Kershner explained that there was no actuarial value
associated with contributions in the DC plan. He shared
that the only actuarial costs used for DCR were
occupational death and disability benefits, and health
benefits, which were excluded from the illustrations on the
slide. He said that for the DC plans for PERS and TRS, both
the occupational death and disability were currently
overfunded, and the liability was zero.
9:53:45 AM
Mr. Kershner highlighted slide 8, "PERS All Others,"
which showed a similar comparison as the previous slide,
but without the numbers for retirement at age 50. He
directed attention to the last row on the tables, which
showed the total employee contributions for DC at 18
percent more than their DB counterparts.
Senator Kiehl noted that two out of three of the boxes
showed the annual benefit 20 years after retirement, which
exceeded the average lifetime of Alaskans after retirement.
Mr. Kershner replied that the 10- and 20-years' timeline
was chosen randomly. The life expectancy was reflected in
the present value calculation. The fact that some members
may not be alive 20 years after retirement should be
considered, but the annual benefits at 10 years and 20
years were illustrative amounts to show the impacts of the
post-retirement benefit adjustment, but the life expectancy
was reflected in the present value calculations.
Senator Kiehl thought that without factoring in the life-
expectancy delta there might be a disparity between total
employee contributions and the annual benefits. He
considered that the disparity was not so great when the
pooling effect was considered.
Mr. Kershner asked what Senator Kiehl meant by pooling
effect.
Senator Kiehl thought that with DB there was the ability to
pay the benefits 20 years after retirement to those who
were still living, but some of the money used came from
those who lived the average life-expectancy or less.
Mr. Kershner agreed that there would be some members that
died before their life-expectancy and some members who
outlived the life-expectancy. The decrease in benefit for
those who dies would be used to pay for those that lived
longer. On the DC plan, if someone took their accumulated
DC balance upon retirement, that would be the total amount
they would ever receive.
Mr. Kershner continued that if a member chose to annuitize
the benefit, there was a risk that they may not receive the
full worth of the benefit. There were options DC members
could elect, to annuitize to ensure that the participant
would receive their DC balance paid out as benefits.
9:59:57 AM
Senator Kiehl considered how few people would have 35 years
of service and still be receiving a benefit 20 years after
retirement, and how many fewer would do the same with 40
years of service. He understood that the age 25 at the
beginning of service was used for consistency with past
comparisons, but suggested that the average age should be
35, realistically. He felt that very few people would be
receiving benefits 20 years after retirement.
10:00:51 AM
Senator Kaufman thought Mr. Kershner had indicated that the
numbers were based on single survivorship.
Mr. Kershner agreed.
Senator Kaufman wondered what a spouse would get in the
event of the death of the primary account holder, assuming
there was a survivor benefit.
Mr. Kershner said it would depend on the participants age
and gender, as well as the age and gender of the
beneficiary. He used the example of a male participant with
a female spouse who was three years younger, a 50 percent
survivor benefit would pay a fixed amount for as long as
the participant was alive. When the participant died, their
spouse would receive 50 percent of the amount the
participant had been paid when alive, for the remainder of
their lifetime. He provided several options available for
survivor benefits.
10:05:18 AM
Co-Chair Stedman thought it would be helpful to look at
benefit comparisons for the average PERS employee in 5-year
increments. He stated that most people did not stay in
state employment for 30 years. He recognized that there was
interest in excluding workers that did not make it 25 or 30
years but felt the impacts of those employees was
important.
Ms. Lea agreed.
10:06:55 AM
Mr. Kershner looked at slide 9, "TRS," which showed a
comparison for DB Tier 2 versus DC Tier 3; a similar layout
as reflected in slide 7. He noted a difference in employee
contributions where DB members contributed 8.65 percent,
while TRS DC members contributed 8 percent. The total
contributions for DB members were greater than those for
DC.
Senator Cronk relayed that he was a 25-year TRS retiree. He
thought there was no way that hed paid in the amount he
would be drawing out. He likened the retirement plan to a
legalized Ponzi scheme. He wondered how the system could
sustain itself.
10:10:16 AM
Mr. Kershner clarified that Senator Cronk was referring to
DB.
Senator Cronk answered in the affirmative.
Mr. Kershner pointed out that the top left box showed a TRS
retiree who retired at age 50 and contributed $183,134,
over 25 years. He asked to keep in mind that the DB plan
had three sources of contributions: members, employers, and
the state. He shared that the excess of the actuarial
determined contribution rate that was not paid by members
or employees was paid by the state. He said that additional
state contributions fluctuate every year. He said that
there was a large portion of the DB plan, not reflected on
the slide, that came from the employers and the state.
Co-Chair Stedman recalled that Ms. Lea had given a
presentation to the other body that contained up-to-date
tables on the unfunded liability payments. He thought that
it would be beneficial to incorporate the data into
upcoming presentations. He wondered whether the Tier 1 and
2 numbers for TRS could be bifurcated, as their unfunded
liabilities differed.
Mr. Kershner replied that it was possible. He said that the
evaluation reports provided the expected normal cost, by
tier. He lamented that there was no way to allocate the
unfunded liability by tier because there was one pool of
assets used for all participant beneficiaries. He said
there was no way to allocate assets by tier.
Co-Chair Stedman felt that it was important to recognize
that older tiers were more expensive.
Senator Kiehl asked Mr. Kershner about his use of the term
"normal cost."
Mr. Kershner explained that there were two components of
the actuarial defined contribution rate for DB and DC. The
normal cost was the actuarial value of benefits expected to
accrue in the upcoming year as active employees earned one
more year of benefit.
Senator Kiehl asked about the employer normal cost for a
TERS Tier 2 member.
Mr. Kershner relayed that for TRS Tier 2, the employer
normal cost as percentage of the Tier 2 compensation for FY
25, the pension normal cost was about 7.8 percent of pay
and the healthcare was about 7 percent of pay, for 14.8
percent total. He added that was net of the member
contribution of 8.65 percent.
10:18:00 AM
Co-Chair Stedman mentioned the supplemental benefits system
(SBS) and noted that TRS was not included in SBS or Social
Security. He asked Mr. Kershner to incorporate what the
numbers would look like with fewer in PERS with SBS versus
TRS. He mentioned that some members were concerned that TRS
was deficient without Social Security or SBS.
Ms. Lea agreed to provide the information.
Co-Chair Hoffman asked for the percentage of state
employees under the DB plan at the end of the previous
year.
Co-Chair Stedman believed Ms. Lea had the information.
Ms. Lea cited that there were about 7,900 active DB members
currently.
Co-Chair Stedman asked for the charts to be given to the
committee.
Senator Cronk to clarify that the employer was the state
and the TRS retirement benefits came from the state.
Co-Chair Stedman relayed that years ago when the retirement
plan had been rewritten, the constitutional obligation for
the state was for education, which was why the state picked
up the TRS balance. He thought another issue of interest
was the amount of non-state employers that were not paying
PERS obligation, and who was paying for it. He thought the
matter should be looked at.
Senator Kiehl identified that in municipalities that had
school districts, 45 percent to 50 percent of the education
funding came from local tax dollars.
Co-Chair Stedman solicited any closing comments from the
presenters. He discussed housekeeping.
ADJOURNMENT
10:23:49 AM
The meeting was adjourned at 10:23 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 040725 PERS-TRS DB vs DC Comparisons Presentation to Senate Finance April 2025.pdf |
SFIN 4/7/2025 9:00:00 AM |