While the history of the Public Employees Retirement System ‎(PERS) and the origins of its $26 billion in unfunded pension obligations have been well covered, stakeholders have proposed few recommendations. It would be helpful for Mississippi stakeholders to examine how other states addressed similar public pension challenges, including reducing public pension debt and rising costs to taxpayers and making their pension plans more sustainable in the future.

North Dakota provided new hires with a new defined contribution retirement plan

Like the challenges Mississippi faces, the North Dakota Public Employees Retirement System‎ (NDPERS) would have continued to accrue unfunded liabilities in perpetuity without significant changes and additional funding. Maintaining statutory rates with incremental rate adjustments was insufficient, resulting in the contributions from workers and employers consistently being below what was required to properly fund the pension plan (also known as the actuarially determined contribution rate, or ADEC). In addition to its financial woes, the NDPERS defined benefit (DB) plan was also experiencing massive employee turnover, similar to what Mississippi PERS is seeing.

After a collective effort to identify and solve the problems facing NDPERS, state legislators penned North Dakota House Bill 1040, which addressed the longstanding issue of systematic underfunding by transitioning from fixed contribution rates to an actuarially determined contribution rate. 

Additionally, North Dakota’s legislation offered all future public employees a defined contribution (DC) retirement plan, which was projected to provide a greater retirement benefit for most employees without the risk of runaway costs and debt plaguing the defined benefit pension system. 

The state committed to paying off NDPERS’ existing $1.8 billion debt over 30 years, supplemented by additional cash infusions until the defined benefit plan reached 90% funding—meaning it has money to cover 90% of the pension benefits already promised to workers. 

Modeling forecasts estimated the bill would save the state $2 billion over 30 years compared to the status quo. The pension reform also promised improved retirement benefits for most newly hired employees, significant debt reduction, and eventual budget relief for North Dakota.

Arizona opened a new DC/hybrid choice system for public safety

The need to reform Arizona’s Public Safety Personnel Retirement System‎ (PSPRS) became urgent due to its declining financial health, which resulted in soaring annual pension costs for local governments and state agency employers. The pension system was burdening taxpayers with significant new, unexpected costs. The two primary factors contributing to PSPRS’s financial deterioration were its flawed permanent benefit increase (PBI) mechanism meant to serve as a cost-of-living adjustment (COLA), similar to the Mississippi PERS COLA, and underperforming investment returns that failed to meet overly optimistic expected rates of return.

The 2016 pension reform of Arizona’s PSPRS encompassed various elements affecting current workers, retirees, and future employees. The reform replaced the permanent benefit increase feature for current personnel and retirees with a pragmatic, pre-funded cost-of-living adjustment tied to inflation that protects fixed retirement benefits without adding unnecessary costs to taxpayers. 

To address the growing costs of PSPRS, Arizona’s public pension reform also introduced a new retirement plan design for new employees, offering a choice between a defined contribution plan and a defined benefit-defined contribution hybrid plan, alongside adjustments to pensionable pay caps, benefit multipliers, and retirement age eligibility. 

Arizona also implemented governance reforms, including changes in the PSPRS board composition and fiduciary standards to increase accountability and efficiency. 

Overall, Arizona’s public pension reform has already yielded significant savings for government agencies and taxpayers, reduced future pension liabilities, mitigated market risks, and provided more sustainable retirement options for public safety personnel.

Michigan opened a new DC/hybrid choice system for teachers

Like numerous other public pension systems across the United States, the Michigan Public School Employees’ Retirement System‎ (MPSERS) grappled with an overwhelming burden of unfunded liabilities and the anticipation of escalating contribution rates. The Michigan teachers’ plan was fully funded in 2000, but by the end of June 2016, the plan’s funded ratio had plummeted to below 60% and had a staggering $29.1 billion in unfunded liabilities. 

Various factors caused this pension debt, with two-thirds attributed to investments falling short of overly optimistic expectations over 15 years. Moreover, flawed actuarial assumptions, such as overestimating payroll growth, compounded the problem.  

In response, Michigan initiated a pension reform effort focused on addressing the needs of current and future members and reducing the state’s financial risks. 

The resulting public pension reform introduced an automatically enrolled defined contribution plan for future members with a minimum 4% employer contribution, extendable by up to 3% in matching contributions. Within four years of membership, teachers became fully vested in a 14% DC Plan, ensuring a robust retirement benefit. 

New hires also have the option to choose a hybrid plan within 75 days of employment. For active and retired members, measures like reducing the assumed rate of return to more realistic levels and moving to a contribution rate floor were also implemented to address potential market downturns and increase legislative accountability in funding obligations.

Texas public employees opened a new cash balance pension plan

Over the last two decades, the Employees Retirement System of Texas (ERS), which provides retirement benefits to most state public employees and sworn law enforcement personnel, has declined from full funding to holding $14.7 billion in unfunded pension obligations. 

By 2021, ERS was trending toward complete insolvency within the next 20 to 30 years in the absence of significant legislative changes. Overly optimistic investment return assumptions and underperforming investment returns resulted in over $8 billion in pension debt. Approximately $4.5 billion of this debt stemmed from the state government systematically underfunding its public pension systems through insufficient contribution rates. 

Moreover, a relatively small percentage of Texas workers—less than 14 percent of those hired under age 35—actually worked for the government long enough to receive a full, unreduced retirement benefit. A significant portion, 64 percent of Texas state workers, worked for the government for less than five years and didn’t even qualify for a pension.

Texas Senate Bill 321 employed two key strategies. Firstly, it revamped the retirement plan for newly hired workers by introducing a cash balance pension, reducing taxpayer financial risk over time by guaranteeing a return on investments instead of guaranteed lifetime income. The cash balance approach reflected the successful experiences of Texas’ municipal governments, which had used this type of plan to offer valuable retirement benefits without the compounding costs of pension debt for decades. 

Secondly, the Texas reform addressed funding and contribution policies to rectify two decades of structural underfunding, opting for an ADEC policy and committing supplemental appropriations. With improved funding policies, ERS is now on track to eliminate its debt and funding shortfalls.

The two-step approach of successful state pension reform efforts

Across the various public pension reform efforts mentioned above and pension and retirement plan designs that have emerged from other states over the last decade, a two-step approach has been the foundational organizing principle driving stakeholders to sustainable, long-term solutions. Mississippi should follow suit. 

First, Mississippi lawmakers must establish a plan to fully fund the constitutionally protected retirement benefits guaranteed to workers in the Public Employees Retirement System‎ (PERS), which includes nearly a quarter of Mississippi residents. Second, state lawmakers must create a path to retirement security for all future PERS members. 

Step 1: Establish a plan to tackle unfunded pension benefits as consistently and quickly as possible

The cost of providing PERS pension benefits has never been higher than it is today in the post-Great Recession (2007-2009) financial environment, and allowing PERS’ debt to continue growing will only add to the costs on government employers—and, thus, taxpayers. 

Successful pension reform efforts have limited the impact of rising costs by first focusing on setting the underfunded pension system on a prompt path to full funding through debt segmentation and committing to an actuarially determined contribution rate funding policy. 

Segmenting accrued unfunded liabilities from any gains or losses in future years allows policymakers to set the past debt on a direct and fiscally realistic course to being fully funded and prevents the need to revisit the issue in subsequent legislative sessions. 

Adopting more conservative payroll growth and investment assumptions and a responsible amortization policy for any emerging unfunded liabilities would ensure that the new pension debt accrued in a given year is paid off faster and more consistently. 

Committing to an ADEC funding policy to regulate contribution rates guarantees the funding goals are met regardless of market volatility.

Step 2: Create a path to retirement security for all participants 

In addition to the rising costs associated with the current PERS benefit, analysis of assumptions used by plan actuaries reveals that 81% of new workers (beginning work at age 25) leave before vesting in the plan with eight years of service. Employees who leave the plan before then are unable to receive a PERS benefit and must forfeit contributions their school or the state made on their behalf. For workers starting at the age of 25, 89% leave before 20 years of service, and only 9% remain in the system long enough to receive full pension benefits after 30 years of service. 

The fact is that very few employees entering public employment in Mississippi will take part in the full pension benefit as it is currently offered.

The examples above from North Dakota, Arizona, Michigan, and Texas addressed this issue by modernizing retirement plan design to serve more of their new hires. Although each state adopted unique plan designs, they all achieved the same goals. 

Mississippi policymakers should focus on this approach when considering a new retirement plan for new hires. From the perspective of serving public employees, a successful new tier provides a path to a financially secure retirement for all career and non-career members that is more attractive to the 21st-century employee. 

From taxpayers’ perspective, stabilizing contribution rates for near and long-term budgeting is essential. Reducing Mississippi’s public pension system’s exposure to financial risk and market volatility with responsible debt reduction policies would likely lead to higher contribution rates in the immediate term but will guarantee stakeholders that debt costs are not being passed on to future generations.

Although Mississippi lawmakers attempting to tackle the various challenges facing PERS might find themselves in unfamiliar waters, they should rest assured that those waters are not uncharted. Several other state legislatures have dedicated years to organizing and detailing successful public reform packages that Mississippi lawmakers can take the best of and use to guide how they address the state’s current challenges with PERS. 

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At the same time, the bill will remove taxpayer-borne financial risk over time by entering all public employees hired after January 1, 2024, into the state’s defined contribution retirement plan—a quality retirement plan design currently in place, with no risk of generating future unfunded liabilities. In concert, the reform will close the current NDPERS defined benefit pension system to new entrants.

The need for these pension reforms came about because the North Dakota Public Employees Retirement System, NDPERS, has accumulated $1.8 billion in unfunded liabilities over the past 16 years (see Figure 1). The pension system stands at only 67% funded today, maintains a funding policy that has been structurally underfunding the plan for more than a decade and was projected to go completely insolvent over the next several decades absent significant changes.

Figure 1. Rising Public Pension Debt and Decreasing Funded Ratio

Source: Reason Foundation analysis of North Dakota Public Employees Retirement System actuarial valuations.

Prior to North Dakota’s 2023 legislative session, Reason Foundation operated as pro-bono technical assistants for a state interim retirement committee created under House Bill 1209 during the 2021 legislative session. The committee was charged with studying how to effectively close the current NDPERS defined benefit system and move to an alternative pension plan design. The Pension Integrity Project built an actuarial model for NDPERS to forecast projected costs and risks under a variety of scenarios and made four presentations to the interim committee, detailing our views on effective plan design, transition costs, and benefit modeling. We also provided input and language for the final bill passed by the interim committee.

During the legislative session, we served as technical advisors throughout the legislature’s deliberations on HB 1040, publishing multiple one-pagers explaining the bill, producing scorecards comparing the current offerings to our best practices, and presenting in-person testimony for both the House and Senate’s relevant policy committees. We also presented to both the House and Senate majority caucuses to answer questions about costs and policy considerations.

North Dakota’s Need for Public Pension Reform

Without any changes to the pension system, NDPERS would have continued to accrue unfunded liabilities, ultimately exhausting its assets in approximately 80 years—if everything went as the plan expects. If market returns fell below what the plan expected, its assets could have been depleted in as little as 35 years (see Figure 2).

Figure 2: NDPERS Status Quo—Funded Ratio Forecast

Source: Reason Foundation modeling of NDPERS

The deterioration of NDPERS’ financial health over the past 16 years has led to previous efforts to shore up the system through incrementally increased contribution rates. However, these incremental adjustments were too small and insufficient to meaningfully improve the pension system’s overall solvency. Accordingly, the rates required to begin properly funding the pension plan were never close to being reached, and it became clear that a larger reform was needed to infuse more money into the plan.

While the cost of offering this particular defined benefit pension should be low—the NDPERS benefit formula is one of the least generous among all U.S. public pensions—it was saddled with years of underpaid contributions and high interest rates on the pension system’s accruing debt. Those two factors were the lion’s share of the reason that NDPERS moved from being overfunded in the year 2000 to $1.8 billion in debt in 2022.

Apart from its poor finances, the NDPERS defined benefit plan was also experiencing massive amounts of employee turnover. It became clear to most observers that offering a more portable retirement plan option would greatly enhance the workers of North Dakota’s overall retirement savings. When studying different options, it also stood out that the pension plan being offered to NDPERS employees was the least generous statewide plan in the country. Not only would a new employee need to work for more than 30 years in the pension system to receive a greater benefit than the defined contribution plan that will be offered to new hires under HB 1040, but any swap to a different funding method would saddle new employees with helping to pay down older employees’ pension debts.

Figure 3: Employee Benefit Comparison—Status Quo NDPERS Pension vs. HB 1040 DC Plan

Source: Reason Foundation benefit modeling for NDPERS current pension plan vs. the proposed defined contribution plan in HB 1040.

Goals of North Dakota’s Public Pension Reform

The NDPERS reform effort sought to establish a retirement system that is affordable, sustainable, and secure. Consistent with the Pension Integrity Project’s overall retirement policy goals, the primary goals of North Dakota’s reform included:

• Keeping Promises to Workers: Ensure the ability to pay 100% of the retirement benefits earned and accrued by active workers and retirees.
• Retirement Security: Provide retirement security for all current and future employees.
• Predictability: Stabilize contribution rates for the long term.
• Risk Reduction: Reduce the pension system’s exposure to financial risk and market volatility.
• Affordability: Reduce the long-term costs for employers, taxpayers and employees.
• Attractive Retirement Benefits: The plan should meet the needs of workers and help agencies recruit and retain employees.

Overview of North Dakota’s Pension Reform

First and most importantly, House Bill 1040 fixed the systematic underfunding that NDPERS has suffered over the past two decades by swapping from contribution rates set in statute to an “actuarially determined employer contribution” rate, or ADEC rate for short. ADEC is a calculation performed by professional actuaries during the pension valuation process that shows what plan contribution rates need to be to pay for both benefits and debt service costs.

The pension benefits promised to members of NDPERS are ultimately the responsibility of the state and local governments—i.e., taxpayers. Continuing to fall short of fully funding these pension promises unfairly passes on the cost of today’s public services to future generations.

Second, this bill closes the current structurally underfunded defined benefit plan to all future new hires and instead offers them a defined contribution retirement plan that our analysis finds meets the high standards of best practices in retirement system design. The reform signed avoids the accrual of new unfunded liabilities related to future hires and would, in 90% of cases, offer a more generous retirement benefit to newly hired workers than the current NDPERS pension no matter when they leave or retire.

To help visualize the thought process behind this reform, think of NDPERS’ unfunded liabilities as an oil spill. The two most urgent actions are: (1) to cap the spill; and (2) to clean up the oil that’s spilled already. The transition to the defined contribution plan for future hires caps the spill because no new hire would ever have the risk of an unfunded pension liability attached to them in the future. The second course of action is to clean up the oil already spilled, which is what the shift to proper actuarial funding does. Over the next 30 years, the state and, on a much smaller scale, its local governments, should be able to pay off the pension system’s existing $1.8 billion in debt by making full actuarial contributions to the NDPERS defined benefit plan.

To assist that paydown, the state has also put other cash infusions into this bill, which will be paid every biennium until the defined benefit plan reaches 90% funding. Our modeling forecasts show that these added funds, coupled with the swap to a proper actuarial funding method, would save North Dakota $2 billion dollars over the next 30 years relative to the status quo and finally put NDPERS back on proper financial footing (see Figure 4).

Figure 4: NDPERS Funded Ratio Trajectory, Current Plan vs. HB 1040 Reforms

Source: Reason Foundation modeling of HB 1040 reforms and NDPERS actuarial valuations.

Expected Effects of the Pension Reform

Overall, North Dakota’s important pension reform will yield several key benefits to taxpayers, employers, and NDPERS employees:

• For the 91% of all newly hired state and local government employees who will not stay in their NDPERS-covered employment jobs for 30 years, they will receive better retirement benefits than the current defined benefit pension plan offers.
• Swapping to ADEC funding ensures the already accrued pension debt will finally begin to be paid off, saving the state billions of dollars in added debt and interest costs over the next 30-50 years.
• Once NDPERS becomes fully funded, contributions to the plan will drop drastically. This allows for more space in the state budget to fund other programs and positions, or provide tax relief to the citizens of North Dakota.

Conclusion

The passage of HB 1040 is the state making an overdue commitment to fully pay for the retirement benefits it has already promised generations of public workers and retirees of North Dakota, who understandably expect to have the pensions promised to them adequately funded. The bill also protects taxpayers by preventing future public pension debt and provides future hires with a modern, flexible retirement plan that better meets their needs.

Additional Reason resources on NDPERS reform

• Testimony: North Dakota’s HB 1040 would address many challenges facing NDPERS (reason.org)
• One-pager: Benefits of reform: North Dakota’s HB 1040 would address many challenges facing NDPERS
• Analysis: Does HB1040 meet objectives for good reform?: Does North Dakota House Bill 1040 meet the objectives for good pension reform?
• Analysis: Does the defined contribution plan established in HB 1040 meet gold standards?
• Analysis: North Dakota Public Employees Retirement System Pension Solvency Analysis
• Addressing pushback from reform opponents: Scrutinizing NDPERS’ cost claims on House Bill 1040

Update: May 1, 2023: Included in the North Dakota Office of State Management budget, the defined contribution plan for new hires now begins Jan. 1, 2024. The previous version of this piece stated the new hire date as Jan. 1, 2025.

The post North Dakota enacts landmark public pension reforms appeared first on Reason Foundation.

• Holds $1.8 billion in unfunded liabilities;
• Is structurally underfunded by legislatively set contribution rates;
• And is expected to become insolvent around the turn of the century even if all its actuarial assumptions are met (faster if they do not).

This backgrounder examines claims the North Dakota Public Employees Retirement System is making about North Dakota House Bill 1040.

Scrutinizing NDPERS’ cost claims on House Bill 1040

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The post Does the defined contribution plan in North Dakota’s HB 1040 meet gold standards? appeared first on Reason Foundation.

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The post Examining the pension reform benefits of North Dakota House Bill 1040 appeared first on Reason Foundation.

Thank you for inviting me to provide our technical analysis of House Bill 1040 based on our experience evaluating pension solvency and design quality nationally, as well as answer any questions the committee may have. Reason Foundation’s Pension Integrity Project operated as pro-bono technical assistants during the interim committee process that led to this bill, building an actuarial model for the North Dakota Public Employees Retirement System (NDPERS) to help inform the process. We’ve thoroughly examined the details of this legislation, as well as the funding history of NDPERS. I have provided several supplemental materials to the committee that I hope are helpful in your consideration of this bill. 

The context for the current discussion is the looming insolvency of the North Dakota Public Employees Retirement System. Today, NDPERS is estimated to be about $1.8 billion underfunded. Even according to a recent report from the National Conference on Public Employee Retirement Systems, an organization that represents and advocates for defined benefit public pension plans, North Dakota is one of just five states that has an unsustainable public pension debt trajectory. 

Without any changes, the North Dakota Public Employees Retirement System will continue to accrue unfunded liabilities, ultimately exhausting its assets in approximately 80 years. HB 1040 would meaningfully address many of the longstanding challenges facing NDPERS, help turn it away from a path of perpetual underfunding and set it on a course to be fully paid off in the next 20 years. 

First and most importantly, House Bill 1040 fixes the systematic underfunding that the North Dakota Public Employees Retirement System has undergone over the past two decades by swapping from contribution rates set in statute to an “actuarially determined rate,” or ADEC for short. ADEC is a calculation performed during the pension valuation process that shows what plan contribution rates need to be to pay for both benefits and debt service costs. The pension benefits promised to members of NDPERS are ultimately the responsibility of the state, local governments, and taxpayers. Continuing to fall short of fully funding these pension promises unfairly passes on the cost of today’s public services to future generations. Adopting an ADEC funding policy is a crucial first step in getting North Dakota on the path to living up to its pension obligations. 

Second, this bill closes the current structurally underfunded defined benefit plan to all future new hires and instead offers them a defined contribution retirement plan that our analysis finds meets the high standards of best practices in retirement system design. The proposed reform would avoid the accrual of new unfunded liabilities related to future hires and would, in most cases, offer a more generous benefit than the current NDPERS pension. 

Our analysis, along with research from the Teachers Insurance and Annuity Association (TIAA), a Fortune 100 financial services organization, presented to the interim committee, showed that for almost any age an employee begins work, the proposed defined contribution plan’s benefits would be more generous than the current NDPERS defined benefit plan’s benefits. This is due to the extremely low multiplier of 1.75% that the NDPERS defined benefit uses for calculating benefits and the high rate of turnover in the plan. I’m unaware of any other fully defined benefit pension plan with that low of a benefit multiplier. 

While the cost of offering the current defined benefit should be low, it is saddled by years of underpaying contributions and the high-interest rate on the pension system’s accruing debt. Those are the two main factors that have moved NDPERS from being overfunded in 2000 to being $1.8 billion in debt. 

To help you visualize the thought process behind this bill, think of the North Dakota Public Employees Retirement System’s unfunded liabilities as an oil spill. The two most urgent actions are: (1) to cap the spill and (2) to clean up the oil that’s spilled already. The transition to the defined contribution plan for future hires caps the spill because no new hire would ever have the risk of an unfunded liability attached to them in the future. The second course of action is to clean up the oil already spilled, which is what the shift to proper actuarial funding does. Over the next 20 years, the state and, on a smaller scale, its local governments would be able to pay off the pension system’s $1.8 billion in debt by making full actuarial contributions to the NDPERS defined benefit plan. 

To assist that paydown, the state has also put other cash infusions into this bill, beginning with $250 million in year one and another $70 million per biennium until the plan reaches full funding. Our modeling forecasts show that these added funds, coupled with the swap to a proper actuarial funding method, would save North Dakota $1.1 billion dollars over the next 20 years relative to the status quo and finally put NDPERS back on proper financial footing. 

Lastly, I’d like to make it clear to this committee that if you hear discussions about the costs associated with this bill, those costs are not the inevitable consequence of shifting to a defined contribution plan for future hires. Instead, the costs reflect the state needing to make an overdue commitment to fully pay for the retirement benefits it has already promised generations of public workers and retirees of North Dakota, who understandably expect to have the pensions promised to them adequately funded. 

Swapping to a different retirement plan design has a negligible impact on the overall costs of any pension reform bill. No new workers are needed to “fund” previously granted benefits; pensions do not operate as Ponzi schemes and should not be treated as such. The cleanup of years of underfunding is where the costs of this bill—and most pension reform bills across the country—come from.  

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Currently, the North Dakota Public Employees Retirement System (NDPERS) has a traditional defined benefit (DB) pension plan for most state and local government employees but also offers to a limited set of state employees the choice of electing to participate in a defined contribution retirement plan instead of the pension plan.

The optional NDPERS DC plan was available to most employees from 2013 to 2017, but effective August 1, 2017, the special enrollment period to all permanent employees ended and plan eligibility returned to just a limited number of employees. With the legislature poised to potentially take a major step by making this optional DC plan the primary retirement plan design for most new state workers outside of higher education, public safety and the judiciary, this analysis examines how well the current North Dakota DC plan meets certain best practice retirement plan design principles and where it may fall short on others.

Strong Contributions Create Foundation for Employee Retirement Security

The greatest strength of the NDPERS DC plan is in its contribution policy. Employee contributions are 7 percent of salary (4 percentpicked-up by the employer and only 3 percent deducted from payroll). Employer contributions are 7.12 percent of salary. This total 14.12 percent of salary adequately meets the contribution recommendations by many retirement experts for non-safety employees, especially considering that participants in this plan are also in social security. This is a contribution schedule that, over a career of employment and combined with Social Security and personal savings, will produce a retirement income that allows plan participants to maintain their pre-retirement standard of living.

One consideration worth noting is that the DC employer contribution of 7.12 percent is the same as in the DB pension plan. While the rates between the two plans are not linked statutorily, the legislature should make clear that there is no link between the contributions in the two plans; different factors and policy considerations are used to determine the proper contribution rates in  DB and  DC plans so it is never a best practice to have the two linked.

Areas for Improving the Current Defined Contribution Plan

Outside of the strength of plan contributions, several important areas of the NDPERS DC plan are not consistent with best practices in DC design. The first among these is unfortunately common in many retirement plan designs today. Plan objectives are not fully and clearly defined in the governing statutes nor any material that participants or others can easily access. In the Statement of Investment Policy for the DC plan, NDPERS states, under Objectives of the Plan, that, “The Plan is a long-term retirement savings option intended as a source of retirement income for eligible participants.

Without a more comprehensive statement of objectives, it is not surprising that the current DC plan lacks certain features that would help it better meet employer and employee long-term retirement needs. It is also impossible to measure the plan’s effectiveness if its very objectives are unclear.

For the sake of this analysis, the objective of the NDPERS DC plan should be to meet employer workplace needs in the recruiting and retention of qualified workers and for the maintenance of an employee’s standard of living through retirement, in combination with Social Security and personal savings, following a full career of employment. (Note that this statement does not specify that the “full career of employment” is with one employer.)

The objective should further include that this benefit is provided in a cost-efficient way without the creation of unfunded liabilities. Preferably, the actual statement of objectives would be comprehensive and detailed enough to include specific income replacement goals and cost targets.

Perhaps the greatest shortcoming that is evident regarding the North Dakota DC plan today is that its very existence may not be clear to those eligible to participate in it as there is very little marketing or promotion of the DC plan.

The DB plan is referred to as the “main” retirement plan, implying, if not outright stating, that the DC is a lesser option. If the current legislative discussions result in defaulting most new hires by the state into the DC, both NDPERS and state employers will need to develop robust ways of helping to articulate the benefit to new hires and communicate the value of this option to those entering the retirement plan.

Improving the Investment and Distribution Options for Participants

Plan investments available in the NDPERS DC plan present a mixed bag of positives and negatives. To the system’s credit, they offer a solid mix of investment funds with acceptable fees and also have a series of target-date funds, also well priced, for participants preferring a “one-choice” option. The number of available funds is not overwhelming nor is it repetitive.

On the downside, there are no deferred annuities offered in the investment menu thereby limiting employee flexibility in preparing for retirement income. Also, it would be preferable to see some guaranteed investments included in the target-date portfolio constructions, again enabling better retirement preparation for participants.

Additionally, asset distribution options available under the DC plan are not consistent with a retirement plan designed to meet the key objective of predictable and stable post-employment income. The standard distribution method offered under the DC plan is a lump-sum withdrawal upon separation from service. The employee can roll this distribution over to an IRA or take periodic distributions. Lifetime annuity purchases are only available by the employee purchasing such annuity on the open market with the lump-sum distribution.

While common, these distribution choices limit the attractiveness of the DC plan as a core retirement plan. The plan sponsor could require annuitization of some or all assets (as they do in the DB plan) but they do not, effectively treating the core DC retirement plan as a supplemental savings plan. DC plans can do better in terms of operating as a true core retirement plan and meeting lifetime income security for employees.

Benefit portability is a key strength of most DC plans. That, however, is limited in the NDPERS DC plan. Savings attributable to employer contributions are vested for the employee over four years of service. This vesting schedule is not ideal and inhibits retirement benefit portability. Full and immediate vesting would be preferred. This schedule also treats defined contribution plan participants less favorably than the DB plan, which vests over three years. The DC vesting period should be reduced from its current level to enhance portability and value for the state’s future workforce.

Improved Disability Provisions Needed for Plan Participants

Finally, the DC plan does not include provisions for disabled employees other than giving them the ability to withdraw assets from the plan. A simple solution to this deficiency would be for the plan sponsor to slightly lower the employer contribution (likely by less than 50 basis points) and purchase insured disability benefits for all participants in the DC plan.

Conclusion

Overall, the NDPERS DC plan has a solid foundation with its excellent contribution rate.  With a few simple changes that would add little if any cost to the state, North Dakota’s DC plan could become a model for public retirement plans across the country.

The post Evaluating North Dakota’s Defined Contribution Retirement Plan for State Employees appeared first on Reason Foundation.

The North Dakota Public Employees Retirement System (NDPERS) has seen a significant increase in public pension debt in the last two decades. In the year 2000, the public pension plan, which serves North Dakota’s state employees, was 115 percent funded and had a $135 million surplus of funds for retirement benefits. Today, the pension plan is only 68 percent funded and has $1.4 billion in debt.

The latest analysis by the Pension Integrity Project at Reason Foundation, updated this month (January 2021), shows that for decades policymakers have created structural underfunding problems for the pension plan. Between 2003 and 2020, employer contributions into NDPERS were consistently less than the actuarially determined employer contribution (ADEC) rate, leading to an increase in unfunded liabilities.

In fact, since 2003, the state has not paid over $585 million in actuarially determined employer contributions to NDPERS because the contribution rate is set in the North Dakota state statute.

Additionally, deviations from the plan’s investment return assumptions have contributed to its unfunded liability growth. This growth in unfunded liabilities has driven pension benefit costs higher while crowding out other taxpayer priorities and programs in North Dakota.

The chart below, from the full solvency analysis, shows the increase in the North Dakota Public Employees Retirement System’s debt since 2000:

Today, NDPERS has only 68 percent of the assets needed to fully fund the pension system in the long-term.

This underfunding not only puts taxpayers on the hook for growing debt but also jeopardizes the retirement security of North Dakota’s state employees. Left unaddressed, the pension plan’s structural problems will continue to pull resources from other state priorities.

The solvency analysis also offers stress-testing designed to highlight potentially latent financial risks the pension system is facing. Reason Foundation also provides a number of policy suggestions that, if implemented, would address the declining solvency of the public pension plan. A new, updated analysis will be added to this page regularly to track the system’s performance and solvency.

Bringing stakeholders together around a central, non-partisan understanding of the challenges the North Dakota Public Employees Retirement System is facing—complete with independent third-party actuarial analysis and expert technical assistance—the Pension Integrity Project at Reason Foundation stands ready to help guide North Dakota policymakers and stakeholders in addressing the shifting fiscal landscape.

North Dakota Public Employees Retirement System (NDPERS) Pension Solvency Analysis

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