Legislature(2023 - 2024)SENATE FINANCE 532
02/23/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Pers/trs Tier Comparisons | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 23, 2023
9:01 a.m.
9:01:13 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Ajay Desai, Director, Division of
Retirement and Benefits, Department of Administration;
Mindy Voigt, Retirement and Benefits Manager, Division of
Retirement and Benefits, Department of Administration;
Representative Andy Josephson.
SUMMARY
PRESENTATION: PERS/TRS TIER COMPARISONS
Co-Chair Stedman discussed the agenda. He noted that there
would be an analysis and comparison of the Public
Employees' Retirement System (PERS) and Teacher's
Retirement System (TRS). He relayed that the presentation
would be one of several presentations over the next year.
He recounted that historically the state had a defined
benefit (DB) plan for many years, and about 16 years
previously had closed the new plans and all new employees
entered a defined contribution (DC) plan for PERS and TRS.
He noted that a lot of municipalities also participated in
the systems.
Co-Chair Stedman recalled that it had been about 16 years
since the implementation of the DC plan, and it was time to
review the performance and status of the newer tiers
relative to the tiers that were replaced. He mentioned the
goal of having a healthy and competitive retirement system
for employees, and to have the new tiers on par with the
tiers that were replaced. He relayed that the Division of
Retirement and Benefits (DRB) would give a presentation. He
noted that the committee had also requested some retention
and turnover analysis, which would be presented at a later
time. He mentioned the importance of the state being an
attractive employer, and its retention and turnover.
^PRESENTATION: PERS/TRS TIER COMPARISONS
9:06:19 AM
AJAY DESAI, DIRECTOR, DIVISION OF RETIREMENT AND BENEFITS,
DEPARTMENT OF ADMINISTRATION, discussed a PowerPoint
presentation entitled "Defined Benefit Versus Defined
Contribution Comparison," (copy on file). He discussed his
background. He had been with the division for about six
years and had spent 29 years in the private sector. He had
worked in the benefits administration arena for 35 years,
and had worked with corporate banks, the Walt Disney
Company, and the motion picture industry.
9:07:21 AM
Mr. Desai looked at slide 2, "Defined Benefit v/s Defined
Contributions":
Defined Benefit (DB) plan
o Is 'defined' in the sense that the "benefit" formula
is defined.
o Employer contributions (Normal Cost and Past Service
payment) will fluctuate annually based on the
actuarial valuation.*
o Benefit calculated on set formulas such as the
multiplier (percentage), salary history, and duration
of employment.
o Provide a fixed, guaranteed benefit for employees at
retirement based on the formula.
o Benefits can be paid as monthly payments for a
lifetime.
Defined Contribution (DC) plan
o Is 'defined' in the sense that the contributions"
are defined.
o Contributions are maintained in an individual
account.
o These contributions are invested on the employee's
behalf.
o Provide an account balance that will fluctuate due
to the changes in the value of the investments. The
employee will ultimately receive the balance in their
account based on contributions plus or minus
investment gains or losses.
o Benefits can be a lump sum, rollover to another
retirement plan, or conversion to annuity payments.
Co-Chair Stedman asked how Mr. Desai had compared the DC
plan to the DB plan.
Mr. Desai explained that when a person retired and planned
for retirement, the most important comparison was the last
salary earned with the pension benefit that would be drawn
each month. He recounted that many years previously the
rule of thumb had been that when a person retired, they
must have at least two-thirds of the salary income to
retire. Presently the amount was 70 percent. He pondered
how to compare the lump sum to the last salary, and how to
compare against monthly pension benefits. He relayed that
he would try to show a scenario to compare the plans.
9:12:03 AM
Mr. Desai spoke to slide 3, "Chronology":
PERS
• Defined Benefit Tiers
o January 1961: Established
o July 1986: Tier II established
o July 1996: Tier III established
• Defined Contribution Tier
o July 2006: Tier IV established
o July 2008: Cost Share with 22% employer contribution
rate
TRS
• Defined Benefit Tiers
o March 1945: Established
o July 1990: Tier II established
• Defined Contribution Tier
o July 2006: Tier III established
o July 2008: Cost Share with 12.56% employer
contribution rate
Mr. Desai indicated that in any given year when the
actuarial valuation was done to determine the contribution
rate, if the rate was over 22 percent, the state
contribution would fill the gap. He noted that the state
had paid about $8.2 billion in additional state
contributions.
Co-Chair Stedman asked for more detail and history related
to the tiers.
Mr. Desai recounted the establishment of the tier I DB
system, until July 1986 when tier II was established. He
continued that tier II simply changed the eligibility rule
from age 55 to age 60. He discussed changes between tiers I
and II and tier III, in which the primary calculation
changed from 3 years to 5 years.
Mr. Desai discussed the changes in TRS since it was
established in 1985. Under the PERS system, tier IV offered
a DC plan. He explained that prior years offered DB plans
based on a formula with a flat benefit for a lifetime.
Under DC tiers, funds were invested in a marketplace and
benefits were based on returns. There were multiple options
as to how the funds could be managed.
9:17:06 AM
Co-Chair Stedman asked Mr. Desai about his mention of $8
billion.
Mr. Desai recounted that two years after the DB plans were
ended, a cost-share plan was adopted by the legislature. As
a part of the statute, all of the PERS employers would
contribute up to 22 percent. He explained that the reason
was that at the time, the annual rate was over 30 percent
each year and would be cumbersome for employers due to
unfunded liabilities. The cost-share plan would offer
employer a flat 22 percent contribution rate, despite the
actuarial rate for each year. The gap between the actuarial
rate and the flat 22 percent rate would be made through a
state contribution for all employers under PERS.
Co-Chair Stedman asked for some of the fundamental reasons
as to why tier IV was created. He asked Mr. Desai to
discuss the creation of unfunded liability, and to discuss
who was responsible.
Mr. Desai relayed that when a pension plan was created, it
was created by the employer. An employer had the option of
offering an independent single employer plan, or to join
into the multi-employer plan. In the private sector it was
also known as a multi-employer plan. In the situation being
discussed, over 200 employees had come together in the PERS
and TRS plans. Each employer was responsible for the
nominal cost, which was the valuation of each person
working. When the nominal cost was regularly paid, it was
added to the trust fund and future benefits would be paid
to the retirees. In an environment when the market was not
returning what was expected, an unfunded liability was
created.
Mr. Desai continued to discuss the unfunded liability. He
pondered a return rate calculated with the present value,
which was a changing number due to variation in the
marketplace and could create unfunded liability. The
unfunded liability was the employer's responsibility, and
each employer would pay its own share based on its employee
pool under the plan. The calculations and annual valuations
would include a calculation of nominal cost and unfunded
liability for each employer.
Mr. Desai discussed potential different employee costs. He
explained that by adopting the 22 percent flat rate for all
PERS employers, the state had to step in to fill the gap of
owing beyond 22 percent. He mentioned the cost sharing plan
started in 2008 and estimated that all the additional gaps
for state contribution added up to about $8.2 billion.
9:22:40 AM
Co-Chair Stedman summarized that the unfunded liability
created by all the tiers added up to $8.2 billion, and the
cost was covered by the employer.
Mr. Desai relayed that the goal of the cost-sharing plan
was to cover a 100 percent funding ratio, so that every
person in the retirement system was covered regardless of
what happened in the market. He noted that actuarial
studies showed that the last DB employee would be done at
the end of the century.
Co-Chair Stedman rephrased that the liability was projected
to last until the end of the century until the state paid
it off.
Mr. Desai answered affirmatively. He noted that funding
policy had published with the cost sharing plan in 2014.
Co-Chair Stedman wanted to make the point that the
liability sat with the employer rather than the employee.
He thought there might be confusion that employees were
paying for previous tiers, which was not the case.
Mr. Desai agreed. He explained that under the defined
benefit plan, the entire responsibility went to the
employer.
Co-Chair Stedman thought it was important to understand
when contemplating the new tiers on the next slides.
9:25:50 AM
Co-Chair Olson thought it sounded as though smaller
entities such as municipalities would find it easy to go
bankrupt with a 22 percent contribution rate. He asked if
there were records of which employers had suffered from the
negative stock market.
Mr. Desai agreed that each employer did pay 22 percent
based on its pool of employees.
Co-Chair Olson asked if the municipality was on the hook
for making up the difference with the unfunded liability.
Mr. Desai explained that in the cost-share plan, each
employer was equally responsible. He explained that the
multi-employer plan was looking to fill the gap for the
promises that were made to employees. Before 2008, each
employer would have to have paid a much higher cost than
the 22 percent that was in effect currently.
Co-Chair Stedman clarified that the legislature put in a 22
percent cap after a concern that some communities (such as
Fairbanks) would go broke and would not be able to handle
the pension liability. The state had picked up the balance
over 22 percent.
Mr. Desai referenced slide 4, which showed a table
depicting contribution rates for different tiers. He noted
that under PERS, the employee paid about 6.75 percent for
all other categories, 7.5 percent for peace officers and
firefighters, and 9.6 percent for school district alternate
option. Under the DC tier IV, the employee contribution of
8 percent went to the individual account. The employers
under tier III paid the nominal cost, currently 22 percent,
with additional contributions from the state. Under the DC
tiers, the employer paid 5 percent that went toward the
individual blance of the employee. Similarly, under TRS the
employee contribution rate was 8.65 under tier II, and
under tier III it was 8 percent. Under the tier II DBplan,
employer contribution was the nominal cost plus the
unfunded liability capped at 12.56 percent. The employer
contribution on the DC tier was at 7 percent, which went
into employees individual accounts.
Mr. Desai identified that the table below showed the
Supplemental Annuity Plan (SBS), which had an employee
contribution of 6.13 percent and an employer contribution
of 6.13 percent.
9:31:04 AM
Senator Kiehl thought it looked like the slide only
compared the DB pension and the DC individual account cost.
He asked if there were healthcare costs under the DC plan
that would be included.
Mr. Desai relayed that part of the 22 percent contribution
included healthcare costs. The numbers were broken down in
the presentation that he had provided the previous week. He
explained that the intent of the presentation was more
towards the pension comparison between tier III and tier
IV. The 12.56 contribution rate also encompassed healthcare
costs.
Senator Kiehl asked if the PERS tier IV DC employer numbers
did not include the other costs.
Mr. Desai agreed that the 8 percent from the employee and 5
percent from the employer under PERS was directly towards
individual account balances for pension only.
Senator Kiehl thought it looked like the state would focus
on the pension side. He asked what share of the 22 percent
rate paid by employers prefunded the pension check.
Mr. Desai recalled from the most recent actuarial study
that about 2.64 percent was the normal cost and about 16
percent was for the unfunded liability.
Mr. Desai turned to slide 5, "Comparison":
• What are we comparing?
o DB Plans provides fixed monthly benefits based
on the pre-defined formulas, where the benefit
does not fluctuate
o DC Plan account balance will fluctuate due to
the changes in the value of the investments
• Is it a true or fair comparison?
o These comparisons are illustrated based on DC
account balances calculated assuming the long-
term average rate of returns and also assuming
the average interest rate for annuity payouts
o It may derive lower or higher account balances
and possibly lower or higher converted annuity
payments based on the actual rate of return and
the prevailing interest rate
9:34:48 AM
Mr. Desai considered slide 6, "Formulas and Assumptions,"
which showed DB plan formulas. He identified that the top
section showed the DB plan formulas. He mentioned that for
tiers I/II/II of PERS and tiers I/II for TRS, there was
some information about how the benefits were calculated and
eligibility rules. He highlighted that the normal
retirement age had changed for tier I versus tier II. He
discussed multipliers, with a 2 percent formula for the
first 10 years PERS, and a 2.25 percent for all tiers for
years 10 to 20, and 2.5 percent for any years over 20.
Similarly, there was a different formula for TRS. He
explained that the 2 percent formula simply derived a 20
percent benefit every 10 years. The amounts could fluctuate
somewhat based on final average earnings and the formula
beyond 10 or 20 years.
Mr. Desai considered the DC plan assumptions listed on the
slide. The slide considered entry level salaries for each
group, for all employees under PERS, firefighters and
police officers, and teachers. The salary was projected
with 2.75 percent wage increases per year, then further
assumed a 7 percent annual rate of return. Under the
assumption there was an average life expectancy of age 85.
Mr. Desai continued that there an approximate 5.89 percent
annuity rate payout. He noted that once a person started
drawing benefits from the DC plan, there was a reduction
each month. He noted that the data on the slide had used a
7 percent market rate to project the account balance.
9:38:59 AM
Senator Kiehl appreciated the information on the slide. He
asked what respective group was used for the entry level
salaries.
Mr. Desai thought further slides would show more
information related to Senator Kiehl's question.
Co-Chair Hoffman asked about the highest average salary for
PERS for the highest three years of earning. He asked if
overtime and bonuses were included in the highest three or
highest five years of earning for calculating retirement
years.
Mr. Desai affirmed that the highest three or five years of
earnings used for calculations included overtime and
included a differential for police and firefighters.
Co-Chair Hoffman asked if the calculation included bonuses.
Mr. Desai relayed that under the statute, there was no
specific description of using a bonus for the highest three
or five years of earnings.
Co-Chair Stedman asked for more detail.
Mr. Desai relayed that the definition of compensation
included overtime but did not address bonuses.
Co-Chair Stedman asked if bonuses were included in the
calculation.
9:41:16 AM
MINDY VOIGT, RETIREMENT AND BENEFITS MANAGER, DIVISION OF
RETIREMENT AND BENEFITS, DEPARTMENT OF ADMINISTRATION,
relayed that bonuses were included in the compensation
calculation based on the way they were defined. If the
bonus was defined as for services rendered then it was
included. If the bonus was for a person leaving service, it
would not be included in the calculation.
Co-Chair Hoffman asked if it was normal for other systems
to have overtime included in the calculation for highest
years of earnings.
Mr. Desai affirmed that it was normal for a retirement
system to use overtime, and other plans even included
commission. Whether or not parts of compensation could be
used or not used towards a pension benefit calculation was
specifically identified.
9:42:31 AM
Senator Kiehl asked about the 7 percent return assumption
for DC participants and asked if there were actuals to show
the return.
Mr. Desai relayed that a further slide would show the
information.
Senator Kiehl asked for discussion of the annuity payout
rate. He had been unable to find the current annuity rates
on the states retirement website. He had found lower rates
from other sources. He asked how the state derived what he
considered a significantly higher rate.
Co-Chair Stedman suggested that Mr. Desai discussed the
definition of annuity.
Mr. Desai explained that an annuity was a total annual
payout from a specific source, and there were different
annuity calculations. In most cases, annuities involved
for-profit insurance companies with much lower rates.
9:46:10 AM
Senator Kiehl asked if one would expect a person that
managed their own withdrawals would try and draw about four
percent and then adjust for inflation. He asked why the
state would use something significantly higher.
Mr. Desai agreed. He explained that any financial advisor
would use a rule of thumb to extend your funds by using
four percent, or five percent at most. The illustration
that was being considered tried to show as closely as
possible the rate of return compared to projections. He
considered that after having an assumption of 7 percent
earnings, using 5.89 was still comparatively conservative.
Senator Kiehl asked with the 5.89 percent assumption, was
there an assumption that the annuity provided an inflation
adjustment through the retirement years.
Mr. Desai stated that when assuming the annual rate of
return, in general inflation was included as part of the
interest rate.
Senator Kiehl asked to restate his question.
Co-Chair Stedman suggested the discussion take place when
there were numerics on the slide to consider.
9:49:51 AM
Mr. Desai displayed slide 7, which showed a table with a
comparison of PERS tier III DB and tier IV DC plans. The
table used an entry level salary with a mid-range of about
$57,949, assuming a 2.75 percent wage increase per year. On
the left side, he pointed out that column A showed total
service up to 30 years. The last salary was shown at
$64,591. He noted that based on the formula from tier III,
after five years and being vested, there would be about
$6,100 of annual pension benefit, which was about 9.48
percent of the salary. At 30 years, there was about a 64
percent salary replacement ratio.
Mr. Desai addressed the right side of the table on the
bottom right of the slide, and noted employee contributions
were at 8 percent and employer contributions were at 5
percent. He discussed account balance growth shown in
column E. He compared column D and column G, which
indicated there was a gap in the salary replacement ratio.
9:54:39 AM
Senator Kiehl asked how the entry salary was chosen to use
as an example.
Co-Chair Stedman asked how the starting salary was chosen.
Mr. Desai recalled that he had tried to pick a middle range
rather than the highest or lowest. He noted that slide 16
would show how the exercise came close to the real data.
Co-Chair Stedman did not want the committee to get involved
in comparisons of hypothetical situations. He wanted to
look at performance and actual results.
Senator Kiehl thought there was some relevance in what was
being looked at. He looked at column C for the DB members,
and thought it reflected a starting annual benefit with
eventual mandatory pension adjustments that accounted for a
portion of inflation. He considered column F, and asked if
under the assumptions on the model it would be a flat
number for the retirees life or if there would be an
adjustment.
Mr. Desai affirmed that on the DB side on column C, there
was room for post-retirement adjustment for Tier I, which
may or may not be for other tiers. He reiterated that on
the DC side, the assumptions were based on the assumed
rate. If the returns were higher or lower in future years,
the numbers would change. He emphasized that that the
entire structure of the DC plans solely depended upon
market returns. The state could only make assumptions. He
agreed that the annuity in column F would also fluctuate.
9:59:11 AM
Mr. Desai highlighted slide 8, "PERS - Tier III and Tier IV
Comparison - Peace Officers/Firefighters," which showed a
table. The data used a salary range starting at $80,000. He
observed that the slide would address some of Senator
Kiehl's earlier questions. He thought it was interesting
that on the DC side that regardless of salary amount, the
salary replacement ratio was identical.
Co-Chair Stedman wanted to slow down the process. He
mentioned that the presentation was informational for the
public. He wanted to ensure the concepts behind the slides
were understood. He wanted the concepts explained so that
the average Alaskan would be able to understand.
Mr. Desai explained that the slide showed similar
information to slide 7. He pointed out the employee
contribution rate of 7.5 percent, compared to a 6.75 rate
for others. Because of the formula difference, the annual
benefit was a bit higher compared to slide 7, and the
salary replacement ration was also slightly higher. On the
right side of the slide, it showed the same contribution
rate of 8 percent for the employee and 5 percent for the
employer. He identified the account balance on column E and
annual benefits on column F. The salary replacement ratio
was higher for DB plans.
10:03:13 AM
Mr. Desai looked at slide 9, "TRS - Tier II and Tier III
Comparison - Teachers," which was similar to the previous
slide. The entry level salary was shown at $59,581. The
employee contribution rate was 8.65. He pointed out the DB
calculations and salary replacement ratios. He continued
that on the DB side, there was a high salary replacement
rate of 63.28 percent after 30 years. The DC side was
different in that the employer contribution rate was higher
than PERS. He pointed out that the account balance had
grown higher in 30 years and resulted in a higher salary
replacement rate of 70.12 percent.
Co-Chair Stedman asked Mr. Desai to repeat his conclusion.
Mr. Desai reiterated his comments.
Senator Wilson thought tier III would have the same
percentage of salary replacement ratio, regardless of the
salary amount.
Mr. Desai agreed.
Co-Chair Stedman reminded that the presentation had to be
understandable to the general public and others in the
building.
10:06:30 AM
Mr. Desai addressed slide 10, "Actual Plan Data (as of
2/1/2023)
• 1st Group: Comparable Salaries
o Closest match with the projected wage increases
with 2.75% at the respective year of comparison
• 2nd Group: All Salaries
o All comparable salaries plus all salaries
higher than hypothetical projected salaries
• 3rd Group: Account Balances higher than the
projected balances
o Actual account balances for those that are
equal to or higher than the projected with the
7.00% Rate of Return
Note: For all groups above, the member's minimum
account balance must equal or exceed the account
balance projected with a 0.0% Annual Rate of Return.
Mr. Desai reiterated that he used projected information for
the DC plan side and contemplated how realistic the
projected rate of return and payout rates. The division had
compared actual data from 18,000 records of plan data to
compare with the DB side. He discussed comparing actual
salaries with projected salaries. He discussed the
replacement percentage. He thought overtime could
contribute to the findings of higher actual salaries.
Mr. Desai discussed the second comparison, which had shown
that there was a gap between the DB versus DC plans. The
division had also found in the actual data study that many
people had higher balances than projected balances.
10:10:18 AM
Mr. Desai advanced to slide 11, "PERS - Tier III and Tier
IV Comparison - All Other Members," which showed two tables
comparing hypothetical salaries with the salaries of the
three groups shown on slide 10.
Co-Chair Stedman asked Mr. Desai to clarify the three
groups being compared to the hypothetical salaries.
Mr. Desai explained that the numbers on the left in blue
derived from slide 7 and were hypothetical salary
replacement projections using the 7 percent rate of return
for DB and DC plans. The right hand side of the table
showed 17 years of data for three different groups. Column
C was the group that had been considered for actual salary
matching projected salary, and findings had shown about 214
employees.
10:14:07 AM
Mr. Desai discussed the difference in column B and column
C, and the gap in projected salary replacement. He
addressed column D and the group with real data of all
salaries, as compared to the hypothetical salary
projections in column A. He addressed column E, which
derived information from real account balances. The data
showed higher account balances than the projected account
balances under column B. The group had about 528 members.
He thought the column illustrated that there were people
under the DC plan that had drawn account balances with a 7
percent assumption.
Senator Kiehl wanted to understand the proportions on the
slide. He estimated that about 12 percent of the members in
the three groups did better than the projections. He
wondered if the proportion applied to the rest of the
members that had DC plans.
Mr. Desai asked Senator Kiehl to repeat his question.
Co-Chair Stedman thought the question was related to the
percentage of over-performers.
Mr. Desai relayed that the division had not done the
reverse calculation to determine the rate of return for the
group. He relayed that he could do further analysis and get
back to the committee.
Co-Chair Stedman thought it was a significant minority that
had a better actual rate than the projection.
10:19:19 AM
Mr. Desai looked at slide 12, "PERS - Tier III and Tier IV
Comparison - Peace Officers/Firefighters," and addressed
the table on the left side, which derived from slide 8
based on hypothetical salaries for DB and DC plans. The
analysis on the right-hand table with column C showed the
results based on comparable salaries against the projected
salaries. The data found 26 people with comparable salaries
to see how balances came out. Since the numbers were low,
there was a secondary group with 672 members shown in
column D.
Mr. Desai noted that similarly, the last column showed how
many members did better than the 7 percent return assumed
for projections.
Co-Chair Stedman asked for Mr. Desai to share any
difficulties he had finding employees in the data that may
have left and come back.
Mr. Desai relayed that the division had found many people
in the 18,000 records that were pulled that had very low
balances. The division had found that because of the
affordability of the plan, many people had intentionally
left the plan and withdrawn balances and returned to
continue service. He noted many people between 10 and 15
years of service with balances less than $8,000 or $9,000.
He realized it was not possible to use all the data. He
noted that for the comparison purposes, the division had
calculated projections based on a zero rate of return to
calculate the minimum balance. There were many employees in
the group as part of the average that had a very low
balance assuming the zero rate, which was one reason for
low averages in column C and column D.
Senator Bishop asked what Mr. Desai would attribute the low
account balance to when people left and returned to the
plan.
Mr. Desai relayed that research would need to be done to
see the reasons for leaving the plan. The numbers did not
imply that lower balances were indicative of lower returns,
but rather implied that there was a significant group of
people that had previous terminations and re-employment.
10:24:59 AM
Senator Kiehl understood the practice of excluding those
that had terminated and withdrew their money. He wondered
if the table risked excluding people that had experienced
market losses to the degree that the returns were below
zero percent.
Mr. Desai relayed that it was possible through market loss
and lower-than-expected returns that the account balance
would decline from the previous year. He continued that if
balances remained un-drawn, the tendency from market
history indicated that the balance would grow beyond zero
percent.
Mr. Desai showed slide 13, "TRS - Tier II and Tier III
Comparison - Teachers," which was identical to the previous
slide. The left table showed numbers from slide 9 using
hypothetical salaries and projected rates of return. He
noted that similarly, the middle column C showed 215 people
with respective years with comparable salaries to compare
the salary replacement ratio with the projected ratios in
column B. He noted that the amounts were close but there
was still a gap at the 17 years of service. He pointed out
that similarly the entire group with higher salaries was
from a little less than 2,000 employees, and the final
column showed those that earned more than the projected 7
percent.
Mr. Desai referenced slide 14, "Supplemental Annuity Plan,"
which was to show the additional benefit from SBS. He cited
that the most important part of the slide was the left-hand
column, which did not show the DB comparison, since SBS was
defined as a DC. As in previous slides, the tables compared
hypothetical salary replacement projections with three
groups of actual salary data. The one difference was that
under SBS the employee contribution and the employer
contribution were at 6.13 percent, and as a result, one
could see lower account balances.
10:28:48 AM
Mr. Desai turned to slide 15, "Supplemental Annuity Plan,"
which showed the SBS for peace officers and firefighters.
Co-Chair Stedman though cities were not included in SBS.
Mr. Desai answered affirmatively. He directed attention to
column B and noted that he had been able to pull comparable
numbers as there were very few participants under SBS.
Mr. Desai considered slide 16, "PERS - Tier III and Tier IV
Comparison," which showed several tables. He noted that
there was a gap between the DC salary comparison ratio
versus the DB plan. The division had considered if it would
make a difference if were to increase the employer or
employee contribution. As the previous slide, teachers had
a 7 percent of employer contribution compared to 5 percent
for PERS. The left side of the table showed the identical
information from slide 7. Smaller tables showed additional
employer contribution at 6 percent and 7 percent rates. He
pointed out that at the 30-year mark, the 6 percent
contribution rate had increased the salary replacement rate
to higher than that of the DB rate.
Mr. Desai looked at the last table on the slide, which used
a 7 percent employer contribution rate, and the 30-year
amount went up to 70.12 percent for the salary replacement
ratio. Under the DB plan, the ratio was at 64 percent.
10:32:30 AM
Senator Wilson wondered what the tables would signify in
total state dollars. He asked about the amount for a one
percent increase to the contribution rate.
Co-Chair Stedman relayed that he had not asked for the
information to be included in the presentation, and the
current exercise was for the purpose of comparison. He
thought the committee could request the additional
information at a later date if necessary.
Mr. Desai displayed slide 17, "PERS - Tier III and Tier IV
Comparison," which was a similar analysis for peace
officers and firefighters, comparing the 5 percent employer
contribution rate to a 6 percent and 7 percent employer
contribution. He pointed out the left column, which was
similar to slide 8 and showed the current projected
information. He pointed out the one percent increase in
employer contribution, which resulted in a salary
replacement ratio going up from 60.77 percent to 65.44
percent. The projection for a 7 percent employer
contribution rose to 70.12 percent, which was higher than
the DB salary replacement rate.
Mr. Desai highlighted slide 18, "PERS - Tier III and Tier
IV Comparison," which was a similar analysis but specific
to teachers. He noted that the slide title should show TRS
rather than PERS. He noted that for TRS, currently the
employer contribution was at 7 percent, as highlighted on
the left side of the table, and showed a projected salary
replacement ratio of 70.12 percent compared to DB at 63.28
percent. With an additional one percent contribution, the
ratio would change to 74.79 percent, and an additional two
percent would change ratio to 79.47 percent.
Mr. Desai showed slide 19, "Department of Administration -
Championing improvement in the state's performance and
results." He noted that there were a few slides in the
appendix with additional details in the footnotes.
Co-Chair Stedman asked Mr. Desai to present slide 21.
10:36:14 AM
Mr. Desai advanced to slide 21, "PERS - Tier III and Tier
IV Comparison - All Other Members," with a footnote that
indicated additional details of the analysis were included
in slide 7 and slide 11. The hypothetical and projected
information and the middle column showed the tier IV DC
projections with a 7 percent rate of return. The right side
of the page, starting with column H through column L,
showed actual data. He relayed that the state had about 17
years of data for comparisons. He highlighted column I,
which showed average annual salary at $65,116 compared to
the projected amount of $64,591 in column B. At 16 years,
highlighted in yellow, there was a projected salary of
$87,000 while the actual data showed five people with a
similar salary.
Co-Chair Stedman asked if the appendix contained a
comparison of SBS with a DC or DB plan.
Mr. Desai relayed that the SBS information in the appendix
did not show comparison details, but he could provide the
information at a later date.
Co-Chair Stedman thought it would be good to get the
information. He noted that he had asked the department to
list all the communities that were in the plan and included
in SBS. He noted that some communities had opted out of
Social Security but had not opted into SBS, the employees
only had a DC plan. He asked for a status update on the
information request.
Ms. Voigt relayed that she had sent the information to
staff the previous day, and the information would be
provided shortly.
Co-Chair Stedman requested that the information be
submitted for dissemination to all the committee members.
He cautioned care be taken when considering employee
benefits. He pondered why communities would opt out of both
Social Security and SBS. He thought there might need to be
legislation to deal with the situation if necessary.
10:40:59 AM
Senator Kiehl appreciated help with understanding the
comparisons. He would refrain from commenting unless it was
the will of the committee.
Co-Chair Stedman noted there would be further presentations
and opportunity for comments. He mentioned a request for
work on the topic of employee retention and turnover, which
he thought was tied to the retirement system. He noted that
the Legislative Finance Division (LFD) was working on the
information in conjunction with some information on
retirement and benefits in other state agencies. He asked
for any members with questions to submit them to his office
so everyone could benefit from the same information. He
mentioned explanation regarding the data sets, and thought
the process had been more challenging than anticipated. He
thought the director might make some comments on his
background.
Mr. Desai relayed that his previous career included work
with motion picture industry pension and health plans.
Under the plan, there were hybrid benefits offered to
employees and participants joined by studios and union
representatives. Both defined benefit plans produced a
monthly benefit and were 100 percent funded by the
employer. He relayed that he had created a program that
showed realistic comparisons. He shared that he had
pondered whether it was a realistic approach to compare
state programs with insurance-provided annuity, and the
answers he found had not been encouraging. He understood
why people were not interested in converting DC balances
into an annuity.
10:44:25 AM
Mr. Desai continued that it was important to consider how a
person could manage a benefit as an active employee, how it
would grow if a person started drawing from it at the same
pace while it stayed in the marketplace. The model he had
worked on was a simple comparison DB versus DC systems. The
model had assisted in explaining information to colleagues
and board members. When he came to Alaska and encountered
multiple tiers, he already had a comparison tool to use to
see how they systems played out against one another. He
discussed comparisons of tier I, tier II, and tier III
under PERS, which had minimal differences. All three years
had an identical formula except for the 5-year average in
tier III rather than the earlier 3-year average.
Mr. Desai recounted that the DC plan was introduced in
2006. In 2017 or 2018 there had been a bill in place for
firefighters and peace officers, and his comparison had
come in handy in sharing information to illustrate
differences. He discussed the word "pension," which was
defined as a monthly pension, but was simply a benefit
drawn after retirement. There was nothing prior to the
1970s, and in 1978 the first DC plan was established and
recognized, then the supplemental plan was created. He
hoped that he had made some progress in making a side-by-
side comparison, and emphasized that both systems had pros
and cons.
10:48:28 AM
Co-Chair Stedman asked if the same analysis one year
previously would have shown different numerics.
Mr. Desai answered "yes," and noted that one year
previously would have shown a much better position for
actual data.
Co-Chair Stedman asked if Mr. Desai had relied on any of
the state's actuaries when compiling the information, or if
the work was done in-house.
Mr. Desai answered affirmatively, and relayed that no one
had a comparison of the two systems. He qualified that
drawing the lump sum versus a monthly pension benefit based
on a formula was comparing two different things. He
mentioned insurance companies that offered an annuity with
lifetime benefits, although they were much lower.
Senator Bishop relayed that he had written questions he
would provide to the chairs office for the next meeting.
Co-Chair Stedman did not know when LFD would be before the
committee with information about retention, but the
committee would work through the subject matter in the next
couple of months. He thought some of the data would be
useful for some of the bill work in the building.
Co-Chair Stedman thanked the department for the work it had
put together. He discussed the agenda for the following
day.
ADJOURNMENT
10:52:29 AM
The meeting was adjourned at 10:52 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022323 PERS-TRS_DB-Vs-DC_Comparisons_2023-Final.pdf |
SFIN 2/23/2023 9:00:00 AM |