STFA Pension News and Resources

Introduction

The STFA firmly believes in retirement security not only for New Jersey State Troopers, but all Americans.  The STFA also believes this is best accomplished with defined benefit (DB) plans as opposed to defined contribution (DC) plans.  A defined benefit plan allows resources and investments to be pooled; this allows experts to invest large sums of money to maximize returns and the ability to negotiate lower service fees due to the large amounts of money involved.  Conversely, defined contribution plans are not pooled; each individual investor relies on his or her best investment guess, generally can’t negotiate a more favorable fee schedule, and has a smaller account balance.

Traditionally, retirement security was viewed as a "three-legged stool" which consisted of social security, a pension, and personal savings.  Troopers, like many uniformed public safety personnel, do not contribute to social security; so the pension

Many pension systems across the country have been negatively affected by several factors including the recession of 2008, poor management, multiple missed employer contributions, poor investment choices, and increases to benefits while decreasing employer and/or employee contributions.  Although the SPRS has been affected by some of these factors, the only significant factor affecting the SPRS is missed employer contributions in prior years.

The STFA believes the State Police Retirement System is a healthy, effective, and efficient retirement system.  The SPRS has historically adhered to fiscally sound policy (discussed in the "Overview" section).  The only remaining hurdle preventing the SPRS from reaching an optimal funding level is that the employer has yet to pay for contributions not made in the past.

top

Overview of the State Police Retirement System

The State Police Retirement System (SPRS) is one of seven active retirement systems in the State of New Jersey.  It is a defined benefit (DB) plan that is only open to New Jersey State Troopers.  It is one of the healthiest plans in New Jersey due to the historical structure of the plan as well as the implementation of several recent reforms including:

  • the defined benefit has been stable for several decades ( the benefit was not increased in the 1990’s when the funding and returns were high)
  •  the employee contribution rate has been consistent with industry recommendations (7.5% until 2010 when it was increased to 9% of salary)
  • overtime is not used to calculate the retirement benefit (pensions calculations are not "spiked")
  • salary increases over the course of a career are orderly due to existing pay scales and the fact Troopers cannot skip ranks for promotion to higher paying positions
  • an automatic COLA has been eliminated and replaced with a COLA that can be implemented by a committee once the system funding reaches 80%
  • a hybrid DB/DC plan (known as "Tier 2") was created for all Troopers enrolled after May 21, 2010 which caps the salary used to calculate the DB benefit at the annual maximum wage for Social Security Deductions,  the salary over that amount will be placed in the State’s Defined Contribution Retirement Plan

The only factor negatively affecting the SPRS are missed employer contributions over a period of approximately 20 years.  An orderly repayment of this amount is necessary to improve the health of the SPRS and move it closer to full-funding status.  The 2016 SPRS actuarial report indicates this amount is approximately $900M to $1.1B.

The SPRS Pension Board is tasked with approving retirement and disability applications.  It is not responsible for investing fund assets.  The State Investment Council , in conjunction with the Division of Pensions and Benefits, is tasked with creating and executing investment policy.  The investment policy is based on a "one size fits all" approach for all the New Jersey systems as opposed to a separate policy for each system based upon the needs and health of the individual systems.

top

Glossary

All definitions are from investopedia.com unless therwise noted.

401(k) Plan
a qualified employer-established plan to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.
457 Plan
a non-qualified, deferred compensation plan established by state and local governments and tax-exempt governments and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.
Actuarial Life Table (Actuary Table)
A table or spreadsheet that shows the probability of a person at a certain age dying before his or her next birthday. These statistics calculate the remaining life expectancy for people at different ages and the probability of surviving a particular year of age. Because men and women have differing mortality rates, an actuarial life table is computed separately for men and women.
Actuary
a professional dealing with the assessment and management of risk for financial investments, insurance policies, and any other ventures involving a measure of uncertainty.
Amortize
paying off of debt with a fixed repayment schedule in regular installments over a period of time
Annual Required Contribution (ARC)
the amount needed to be contributed by employers to adequately fund a public pension plan. The ARC is the sum of two factors: a) the cost of pension benefits being accrued in the current year (known as the normal cost), plus b) the cost to amortize, or pay off, the plan’s unfunded liability. The ARC is the required employer contribution after accounting for other revenue, chiefly expected investment earnings and contributions from employee participants.  (http://www.nasra.org/files/JointPublications/NASRA_ARC_Spotlight.pdf)
Assumed Rate of Return
the return that a pension fund plans to receive on its investments and is determined by using a set of assumptions to project future investment returns. (https://www.molagers.org/mo-pension-issues.html)
Bonds
a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
Cash Balance Plan
a pension plan under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined-benefit plan. As such, the plan's funding limits, funding requirements and investment risk are based on defined-benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.
Closed Plan
defined benefit plans that provide ongoing accruals but that have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date. (https://www.irs.gov/pub/irs-drop/n-14-05.pdf)
Defined Benefit Plan (DB Plan)
a retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of each of its employees. The defined-contribution plan places restrictions that control when and how each employee can withdraw these funds without penalties.
Defined Contribution Plan (DC Plan)
a retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of each of its employees. The defined contribution plan places restrictions that control when and how each employee can withdraw these funds without penalties.
Employee Retirement Income Security Act of 1974 (ERISA)
usually pronounced "ee-riss-uh"): protects the retirement assets of Americans by implementing rules that qualified plans must follow to ensure plan fiduciaries do not misuse plan assets. Under ERISA, plans must provide participants with information about plan features and funding, and furnish information regularly and free of charge.
Fiduciary (Fiduciary Responsibility)
a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other's best interests. A fiduciary might be responsible for general well-being, but often it involves finances – managing the assets of another person, or of a group of people
Government Accounting Standards Board (GASB)
(GASB; usually pronounced "gaz-bee") An organization whose main purpose is to improve and create accounting reporting standards or generally accepted accounting principles (GAAP). These standards make it easier for users to understand and use the financial records of both state and local governments. The Government Accounting Standards Board (GASB) is funded and monitored by the Financial Accounting Foundation (FAF).
Hedge Fund
alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Hybrid Plan
contains elements of both defined benefit and defined contribution plans. Some hybrid plans have been in place among states for many years; others have been created in recent years. The Internal Revenue Code considers any defined benefit pension plan that accounts for employee contributions, to be a hybrid plan. Because nearly all state and local governments require employee pension contributions, most meet the federal government’s definition of a hybrid. (National Association of State Retirement Administrators, nasra.org)
Income Smoothing ("smoothing")
The use of accounting techniques to level out net income fluctuations from one period to the next.
Index Fund
a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets. 
Mature Pension Fund
the number of contributors to the fund is reduced, and the number of pensioners grows. This ratio reaches or even tips past a point of equality. (http://finance.zacks.com/pension-fund-matures-10968.html)
Mutual Fund
an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's Investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Non-Qualified Plan
a type of tax-deferred, employer-sponsored retirement plan that falls outside of employee retirement income security act (ERISA) guidelines. Non-qualified plans are designed to meet specialized retirement needs for key executives and other select employees. These plans also are exempt from the discriminatory and top-heavy testing that qualified plans are subject to.
Pay-as-you-go (PAYG) Systems
These systems pay pensions out of current contributions or taxes. They are usually run by governments from current tax revenues, and the amounts of the benefits are based on commitments, or promises, made by the governments. (http://www.imf.org/external/pubs/ft/issues/issues29/index.htm)
Plan Sponsor
a designated party, usually a company or employer, that sets up a healthcare or retirement plan such as a 401(k) for the benefit of the organization's employees.
Qualified Retirement Plan
A type of retirement plan established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income-tax liability by reducing taxable income. Qualified retirement plans help employers attract and retain good employees.
Real Estate Investment Trust (REIT)
a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.
Riskless (Risk Free) Rate
the theoretical rate of return attributed to an investment with zero risk. The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time. Investors commonly use the interest rate on a three-month U.S. Treasury bill as a proxy for the risk-free rate because short-term government-issued securities have virtually zero risk of default.
Spiking
Pension spiking occurs when an employee receives a salary increase very close to retirement to inflate  the average final compensation used to calculate benefits. (National League of Cities, "Making Informed Changes to Public Sector Pension Plans. NLC.org).
Stocks
a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
Three-Legged Stool Retirement Metaphor
A common description of a retirement package consisting of Social Security, a private pension, and personal savings and investment. (https://www.ssa.gov/history/stool.html)
Trustee
a person or firm that holds and administers property or assets for the benefit of a third party.
Unfunded Actuarial Accrued Liability (Accrued Liabilty)
the amount of retirement that is owed to an employee in future years that exceed current assets and their projected growth. (http://www.hmeps.org/assets/uaal_-2-24-142.pdf)

top

Pension Related Videos

Ontario Teachers' Pension Plan

The Ontario Teachers' Pension Plan, also known as "Teachers'" or "OTPP" is a recognized leader in the pension sector. The fund manages $175 billion in assets, 80% of which is done "in-house". The plan is currently funded at 105%. The purpose of the OTPP, which is governed by a board representing both management and labor, is to ensure the retirement security of the fund members by making sound investment and management decisions. From the OTTP wesbite: "Ontario Teachers' unique governance structure is a key reason for our success. At the heart of our model is a strong, independent Board that ensures Ontario Teachers' is run like a business. Equally important is our joint sponsorship arrangement that gives members and the government shared responsibility for funding the pension plan."

Below are links to informative videos found on the OTPP website.

CEO Ron Mock on CNBC discussing OTPP and the future of pension plans (May 3, 2017)

OTPP documentary produced in 2013 entitled "Pension Plan Evolution" which outlines how Teachers' is adapting to financial realities.

AFSCME (American Federation of State County Municipal Employees, AFL-CIO) AFSCME produced a "tongue-in-cheek" animated video highlighting the anti-pension efforts of former Enron executive John Arnold.

top

Pension Studies, Reports, and Articles

NCPERS (National Conference of Public Employee Retirement Systems)
From NCPERS website: "(NCPERS) was established in 1941 and has become a leading advocate for public pensions.  NCPERS produces a wide array of publications, seminars, and other resources in support of public pensions and their members."

In our opinion, NCPERS supports the DB plan concept and offers a variety of resources and studies in support of DB plans. 
May 2017 report entitled "Economic Loss: The Hidden Cost of Prevailing Pension Reforms"

April 2015 report entitled "What is the Cost of Transitioning from a DB Plan to a DC Plan"

National Institute on Retirement Security:
(From NIRS website) "(NIRS is) a non-profit research and education organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole."
Feburary 2015, "Case Studies of State Pension Plans that switched to Defined Contribution Plans".

Colorado PERA:
"Colorado Public Employees' Retirement Association (PERA) provides retirement and other benefits to the employees of more than 500 government agencies and public entities in the state of Colorado. Established by state law in 1931, PERA operates by authority of the Colorado General Assembly and is administered under Title 24, Article 51 of the Colorado Revised Statutes. In accordance with its duty to administer PERA, the Board of Trustees has the authority to adopt and revise Rules in accordance with state statutes."
The State of Colorado, through legislation (Senate Bill 14-214) commissioned Gabriel Roeder Smith & Company (GRS) to analyze the Colorado pension to determine if a DC model was better than a DB model.  The analysis clearly showed a DB plan is the most cost effective, beneficial program to both the employer and the State. 
"Comprehensive Study Comparing the Cost and Effectiveness to Alternative Plan Designs Authored by Senate Bill 14-214".
PERA also published a one page, informative, easy to understand graphical summary of the result.

American Association of Retired Persons (AARP):
(From AARP website): "AARP is a nonprofit, nonpartisan, social welfare organization with a membership of nearly 38 million that helps people turn their goals and dreams into real possibilities, strengthens communities and fights for the issues that matter most to families — such as health care, employment and income security, and protection from financial abuse."
AARP created a short report geared for policy makers explaining the positives of a DB plan for workers.

American Legislative Exchange Council:
(From the ALEC website) "The American Legislative Exchange Council is America’s largest nonpartisan, voluntary membership organization of state legislators dedicated to the principles of limited government, free markets and federalism. Comprised of nearly one-quarter of the country’s state legislators and stakeholders from across the policy spectrum, ALEC members represent more than 60 million Americans and provide jobs to more than 30 million people in the United States."

In our opinion, ALEC is generally viewed as pro-DC plan and anti-DB plan, however the STFA believes it is important to seek information from a variety of sources; including those which may be opposed to the defined benefit concept.  Some of the positions ALEC supports, such as de-politicization of investment decisions, structural and policy changes, and analysis of some current pension practices are helpful for achieving a balanced, thorough analysis of the pension issue.

ALEC report "Unaccountable and Unaffordable"
This report focuses upon how the assumed rate of return established by a plan sponsor can impact the calculation of an unfunded liability.  The report argues the use of an unrealistically high assumed rate of return allows sponsors to pay a lower ARC in order to lower pension costs.  However, the report argues that the riskless rate (2.43%) should be used to calculate the ARC.  Obviously such a low rate will greatly increase the unfunded liability.  The STFA believes that just as using an unrealistically high assumed rate of return distorts analysis of a pension system , using a very low rate has a similar affect.

"Keeping the Promise: Getting Politics Out of Pensions<"/a>
While the STFA agrees with some of the proposals within the report, we DO NOT agree with other parts of the report; specifically that a DC plan is a better deal for employees and taxpayers, the assertion that an assumed rate of return of 7% is unreasonable, and the reliance on the riskless rate to assess a plan’s health.

Missouri LAGERS:
(From the LAGERS website) "LAGERS is the largest retirement system in Missouri that serves local government employees. We exist to serve our members. LAGERS membership is made up of thousands of fire fighters, police officers, utilities workers, EMTs, public works personnel, and librarians, to name a few."
In our opinion, this LAGERS webpage provides a great
overview of pension plan types, how a pension plan works, terms, and current topics in the pension debate.

Los Angeles Times:
Public Pension Shocker: "Shutting a Pension Plan Actually Costs taxpayers Money", Aug 21, 2015

top

Recommended Reading

Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers. Ellen E. Schultz. Portfolio/Penguin Publishers. 2012. ISBN 978-1-59184-565-2
From the cover:" Hundreds of companies have slashed pensions and health coverage for millions of retirees, claiming that a "perfect storm" of stock market losses, aging workers, and spiraling costs have forced them to take drastic measures.

But this so-called retirement crisis is no accident. Ellen E. Schultz, an award-winning investigative reporter formerly of The Wall Street Journal, reveals how large employers and the retirement industry have all played a huge and hidden role in the death spiral of American pensions and benefits.

A little over a decade ago, pension plans were fat. But companies used slick accounting and dubious loopholes to turn their pension plans into piggy banks, tax shelters, and profit centers. As pensions weakened, companies slashed benefits for workers while doling out gargantuan pensions to their top executives.

Drawing on original analysis of company data, government filings, and confidential memos, Schultz uncovers decades of widespread deception during which employers exaggerated their retiree burdens while tricking employees, misleading shareholders, and lobbying for taxpayer handouts."

The Third Rail. Jim Leech and Jacquie McNish. McClelland & Stewart Publishing. 2013. ISBN: 978-0-7710-4663-6
From the cover:" Over the next 20 years more than 7 million Canadian workers will retire. Baby boomers, the 45- to 65-year-olds who account for 42% of the country's workforce, will join the largest job exodus in Canadian history, moving to the promised land of retirement. Unless our crumbling pension system is reformed, many of these retirees will find this dreamland a bewildering and disappointing mirage.

In the early 1980s, consumers were setting aside 20% of their disposable incomes to their retirement plans; today the savings rate is a threadbare 2.5%. Retirement savings plans meant to build Canadians' personal war chests for their final years have failed to live up to their cheery promises of early retirement "freedom" - market returns are low, and financial fees are climbing. Moreover, retirement plans are now being compromised by high pension obligations and a shrinking workforce.

Canada has the capacity to diffuse this ticking pension time bomb with some hard choices, posits Leech. It's time for businesses, governments, unions, and employees to face these options and fix - and ultimately save - our pensions system, taking examples from Holland, New Brunswick, and Rhode Island - places in which new laws have been adopted to repair the pensions programs."

top