Asset Managers, Defined Benefit, Institutional Investors, Pension Funds, Public Funds, Retirement Income, Uncategorized

Struggling, Small R.I. Funds Pursue Strategies to Improve Funding Status

While a number of New England pension funds, which aggregate some $2.5 billion in assets under management across 20 open and 14 closed plans, remain critically underfunded, one fund has turned around its misfortune using conservative investment strategies. Others, such as the 24.2%-funded Central Falls, Rhode Island police and fire pensions, are still in rough shape, are seeking remedies, and may be forced to integrate with larger state pension fund to improve their fiscal status.

John Ward, finance director for the Lincoln, RI town retirement plan

The Lincoln town retirement plan is now 66.2% funded, but as recently as January 2015 it stood at a 58.5% funding ratio, below the state’s 60% benchmark for “critical status” pension funds.  According to John Ward, finance director for the $26.5 million plan, who administers the fund’s investments in-house under advisement from asset manager USB, this required the fund to adjust its actuarial assumptions to more appropriate levels. “Like so many other local plans, our rate of return dropped from 8% to between 6% and 7%. We voluntarily dropped our internal rate of return (IRR) to 7% in 2015,” he explained.

The Lincoln town council also passed an ordinance in September 2013 that mandates full funding of required contributions for the pension plan, even if the town’s budget did not meet the requirement, added Ward. “The town budget is approved each year at a town financial meeting in early May,” he explained. “There were years when the Actuarially Required Contribution (ARC) amount was not known at the time of the final budget preparation, so the prior-year amount was used. Once the ARC amount was known, the ordinance required us to pay that amount, even if it was higher than the amount awarded by the town council. Though there was never a difference more than $150,000, I had to incorporate a 2017 budget amendment to balance the ARC out. That problem has now been resolved. We receive the ARC amount well in advance now for the pension plan. ”

The Lincoln town retirement plan’s goal now is to hit an 81% funded status by the year 2025 and to be fully funded by 2035, Ward said.

“This painted a clear picture for the policemen and town employees of the impact of the pension burden on the system,” Ward continued. “Right now, pension contributions are close to or a little above 50% of the annual police payroll, which is a high percentage—it’s the burden of having a lower IRR. We’re attempting to put the pension in a more realistic environment for the future because we have a fairly good grip on where we’re headed with this system; the town administrator is not interested in turning the pension over to the state system. The 80% funded threshold will have us in a better position if earnings continue to reflect something lower than assumed in the past. The goal is to set all assumptions so that the plan will be funded properly, and reflective of conservative expectations to avoid being reactionary to the market – this is a long-term strategy.”

The Lincoln town retirement plan’s goal is to hit an 81% funded status by the year 2025 and to be fully funded by 2035.

The pension contribution for the current year by the town of Lincoln’s police pension, with $18.7 million in assets, is $1.3 million. Because the school employees earn less and have longer employment relative to retirement than the police (who are required to be on active duty for only 20 years to qualify for retirement benefits), the school department contributes 12.5% to the town retirement plan. The plan has 114 active participants, 98 of which are retirees and 22 of which are terminated, vested or deceased.

The asset allocation for Lincoln’s portfolio is split roughly 60% to equity and 40% to fixed-income investments, Ward said. “Our portfolio is a blend of equities and real estate investment trusts (REITs),” he said. John Hancock manages the retiree benefit payment and the remaining pension investments are handled by USB. Nyhart out of Indiana performs actuarial services for the fund, Ward said.

Many local pensions still in the doghouse

“Too many locally managed municipal pension plans in Rhode Island remain critically underfunded, threatening the retirement security of employees who have spent a career in public service,” asserted Rhode Island General Treasurer Seth Magaziner. “With a combined liability of more than $2 billion, underfunded municipal pensions are the greatest financial challenge we face as a State.”

In the 1970s and 1980s, many local plans closed up shop and merged into the state municipal system, Ward said. “This turned the state system into a multi-employer pension group—the value of each pool of funds depends on their unique benefit structures,” he said. “Many communities opted for a ‘pay-as-you-go’ pension plan, which was not beneficial to their long-term interest. They’re now trying to find ways to solves problems that were created 20 to 30 years ago.”

High annual return percentages do not necessarily mean a pension fund is in tip-top shape for its future retirees, noted Evan England, a spokesperson for the $8 billion Employees’ Retirement System of Rhode Island (ERSRI). “A stark contrast exists between the health of municipal pensions in the state system and those operated and run independently,” he said.

High annual return percentages do not necessarily mean a pension fund is in tip-top shape for its future retirees.

In January 2017, the State of Rhode Island Office of the General Treasurer (the Rhode Island Treasury) created an advisory committee to aid locally administered pension plans in the state as they navigate the barriers to joining the state municipal system. The question remains whether these small pension funds have any interest in joining the state system.

“The initial cost for a city or town [to join the state system] could be more within the first few years than what the fund is used to—we are trying to provide these critically funded independent cities the opportunity to adopt changes and phase them in over time,” England said. “The single most important thing is to make a full and accurately calculated annual contribution.”

When the city of Central Falls’ police and fire fund implemented a 55% cut to its pension plan benefits on January 9, 2012, the state of Rhode Island general assembly passed legislation that ensured the town retirees would receive no less than 75% of base pension benefits,” according to Ward. “By funding the difference, the state took away some of the burden from Central Falls,” he added. “The city does not receive the additional benefits; rather the retirees receive the additional pension benefit payments through the state appropriation.”

In 2002, the private Woonsocket police and fire pension plan was zero-percent funded, Ward said. As of 2018, the $38.6 million Woonsocket plan was up to 49.1% funded, according to a report by the Rhode Island General Treasurer’s Office. “I served on the budget commission [for Woonsocket]. We used very conservative investment strategies to bring down the IRR,” Ward added.  “In 2012, the plan reflected the mortality tables of the state pension plan—but we found that it was in fact more prudent to use the tables from 1971 because those reflected a closed plan [similar to the Woonsocket fund],” he said.

The town of Coventry, Rhode Island’s $11.4 million police pension plan is just 16.1% funded; a painfully low percentage compared to the 53% funded, $8 billion Employees’ Retirement System of Rhode Island. Another such example is the City of Providence Employee Retirement System, which has more than $1 billion in liabilities facing its $290 million plan; it is only 27% funded.

“While not every locally-run municipal plan is critically underfunded, a number are facing large liabilities and cannot find efficiencies of scale,” England told IA. “Pension plans with smaller AUMs are not able to negotiate as favorable terms [as a large pension plan would] with consultants and managers.”

Already operating on the margins of viability, leaving very little room for error, many small pension plans do not have enough employees to properly manage the financial responsibilities, England noted. “For some locally run plans, a single employee is tasked with administering the retirement plan, overseeing investments, pension payroll, and processing retirement applications,” England said.

 

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