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Six hot-button issues for public retirement systems

August 25, 2017 Article 3 min read
Manju Patnaik Michelle Watterworth
Public retirement systems and their administrators are facing fast-paced and pervasive changes in policy, operations, and technology. Here are six things to consider.

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In the past decade, the country has seen a huge shift in economic, financial, and environmental factors that affect public retirement systems. Fast-paced changes within seemingly all aspects of these plans have made it imperative that such organizations stay on top of the discussions. Here’s a quick overview of six hot-button issues that you should be discussing with your system.

1. Pension/OPEB reform. Pension/OPEB reform and its implications are being discussed at seemingly every board meeting, at the plan sponsor level, and in public discussions among participants. The stress of declining funding levels has led to public plan sponsors taking drastic steps to maintain adequate funding to meet legacy costs, including benefit cuts, and increases in the age and tenure required to claim benefits. A report from the National Conference on Public Employee Retirement Systems published in May 2017 suggests that many of these reforms may result in hidden economic damage on our state’s and country’s economic future. Fortunately, organizations are beginning to identify a few ways to address funding issues while minimizing economic impacts.

2. Investment challenges. Investment earnings on average make up approximately 60–65% of annual additions to a public retirement system; strategic investing is a key activity for public plan boards and administrators. Diversification and liquidation risks are common criteria that are considered; however, there’s a new risk on the horizon: “longevity risk.” Longevity risk is the potential risk attached to the increasing life expectancy of pensioners and policy holders, which can eventually result in higher pay-out ratios than expected for many pension funds and insurance companies. With standard-of-living improvements, as well as medical progress, member life spans have increased. Retirement plans now need to consider longevity risk while designing their investment strategies — or else face the risk of underestimating cost.

3. Good governance. The composition of a board is key to effective decision making. Every retirement system’s board is different in its thinking and how it approaches issues; however, striving for good governance is a common thread. Here are four important aspects of good governance:
a. Ensuring the direction of the organization is set and understood
b. Verifying that roles and responsibilities are clearly articulated, including those of the board and management
c. Prudently delegating and overseeing what’s been delegated at the appropriate level
d. Providing clear accountability for results, and allowing for corrective action when results aren’t achieved

4. Selecting actuarial assumptions. Whether you’re evaluating long-term rate of return or mortality assumptions, actuarial assumptions are key in calculating pension and retiree healthcare obligations. There are two categories of actuarial assumptions: economic assumptions (dealing with current interest rates, salary increases, inflation, and investment markets) and demographic assumptions (about the participant group make-up and expected behavior and life expectancy). Management is responsible for selecting these assumptions. In order to assess alternatives and select the right assumptions, they should understand how market forces and participant behavior affect the cost of the plan.

Retirement plans now need to consider longevity risk while designing their investment strategies — or else face the risk of underestimating cost.

5. Big data. Big data describes the large volume of data — both structured and unstructured — that inundates organizations on a day-to-day basis. But it’s not the amount of data that’s important; rather, it’s what organizations do with the data that matters. Big data can be analyzed for insights that lead to better decisions and strategic business moves. Public retirement system administrators have large volumes of data, particularly member/participant data, and they’re seeing a growing demand for data-driven analytics in this area. Why? To enable the organization to be more insight driven, rather than impulse driven. Public plan administrators are now discussing tools and techniques available to analyze this data to create meaningful information that management can use, including how public retirement systems can better provide appropriate benefits to members.

6. Cybersecurity. One area of concern for all retirement plan administrators and governance is cybersecurity. Safeguarding financial data and the large volume of sensitive data retirement systems maintain is a priority for everyone. Considering the pace at which IT is changing, it’s important to evaluate your cybersecurity controls and attempt to say one step—or, better yet, two steps—ahead of hackers.

Where is your organization with these conversations? It’s likely you’ve at least touched on all these topics, and perhaps even recently. But do you need to dig deeper? Our experts can help as you further explore these topics.

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