EMPLOYEE TRUST FUNDS PREPARING EMPLOYEES FOR RETIREMENT

In an interview with The Wheeler Report Employee Trust Funds Director Robert Conlin talked about the strength of the Wisconsin Retirement System and the job of ETF in preparing public employees for retirement. Here’s what he had to say:

What are the major accomplishments of your agency?

The biggest accomplishment for our agency is our combined working relationship with State of Wisconsin Investment Board (SWIB).  Our ability to provide in a combined way reasonable cost retirement benefits for 580,000 current and former public employees in the state.  That is our hallmark, what we’re known for, and what we’ve done a great job with. WRS is getting a lot of national attention.  The unique nature of it I don’t think is fully appreciated by people.  Some of that is a unique Wisconsin creation. We have history of funding discipline.  The State has been paying the required amounts over time, the actuary sets the rates. It’s important in understanding  how we ended up in such good shape.  The ability of SWIB, and the discretion they have to manage the investments and the assets of WRS appropriately.  Those three things the funding discipline, the actuary, and SWIBs investments can’t be underestimated.  We work closely together to make sure those things work in harmony. One of the other things is the ability of the two agencies over time to have good working relationships with different administrations and different legislatures to make sure that we have been able to remain strong over time.  We don’t have ups and downs.  It has been consistent over time. 

What are some of the difficulties your agency faces?

Obviously the first one is the continued fallout and financial ramifications of the 2008 market crisis.  One of those unique features of the WRS is the risk sharing mechanism that makes it more difficult.  A lot of places when a pension system runs into difficult times the shortfalls are passed on.  They go back to the general fund and ask for more money.  Here employees, employers, and retirees all share in that investment pain.  That makes it difficult for us to communicate those changes and to deal with the shared nature of the system in these tough times.  Taking and reducing people’s annuities is a very difficult thing.  For example, this year the maximum adjustment in the core fund is a negative 9.6%.   Over the last five years we have taken back about $4 billion in annuity payments.  That’s real money.  That’s a huge challenge for us. 

We are also dealing with our modern administrative ability.  With the increasing number of baby boomers and the expectation that everything should be online, we don’t have those capabilities right now. Being able to meet the growing demand and expectations of our membership is a challenge for us. That’s why we are trying to invest more in our information technology infrastructure.  Hopefully we will improve the efficiency for our employers.  We have about 1500 employers around the state.  We make them jump through a lot of hoops to do their reporting to us.  Ultimately we will be able to streamline some of that and make that easier down the road.

Continuing challenges of the health care industry.  We administer 11 or 12 different fringe benefit programs.  One of them, the second biggest one, is the health insurance program for employees.  The goal there is to provide quality medical care at reasonable cost.  That is increasingly difficult to do.  The cost of health care continues to go up, so finding strategies and implementing those strategies to control costs has been a challenge for us.  We are at the point where everyone has to have a stake in the outcome.  That includes employees and employers.  That’s why you are seeing a turn more towards wellness programs.  Making sure employees are participating or have access to wellness programs. There are health risk screenings that are going on.   We all have a stake in it and we have to provide employees better tools to be able to manage those health costs.

Are there any changes on the horizon with state health insurance options for active and retired employees?

We are always looking for ways to control cost.  The Governor’s biennial budget has a number of provisions that would affect the health programs.  Giving the Group Insurance Board more authority to craft cost savings or cost containment strategies for the health programs.  More emphasis on wellness. There is an opportunity for more flexibility for the Group Insurance Board to make changes going forward to plan design to be more effective and provide more cost savings.  There’s also the Wisconsin Health Information Organization (WHIO).  There is funding there to provide more health data that we use to drive better value and cost containment at the state level. A lot of initiatives going on.  The Group Insurance Board is in the mist of studying a number of both short and long term strategies to get better control of the costs.  It is no longer a case where the employer is picking up all the cost increases.  Employees are increasingly sharing in those cost increases.  It is important for us to look at every avenue in containing those costs going forward.

Can you talk about the Variable vs . the Fixed Programs?

The Variable still exists and people can still get into that.  The fixed is now called the Core fund. The Variable was re-opened in 2000.  We don’t see a lot going on in terms of significant changes.  The Core fund tends to have returns smoothed over five years.  It tends to be a little more stable.  The Variable fund has a lot more fluctuation from year to year, it is invested entirely in equities.  It takes the stock market better.  The budget bill from the last biennium had a study requirement in it that we were required with DOA and the State Employee Relations.  We were required to study the Wisconsin Retirement System and a couple of suggested changes.  That study came out in June 2012.  It emphasized the unique nature and solid statue of the WRS.  It recommended against the two particular changes.  It examined  lot of what makes the WRS what it is today. That was the broad look at it.  There have been legislative proposals  to make some minor modifications.  The Governor had a proposal in his budget, Rep. Stroebel had a proposal on the issue of returning to work once you’ve been retired.   We haven’t seen any major redesign of the WRS.  We are in an envious position.  Some of the pension systems because of their funding status are having to do more drastic modifications to their funding structure.   Because of the risk sharing of the WRS, we don’t find ourselves in the same situation as those other systems.

 How are the changes in the rates determined?

We work closely with our actuary, Gabriel Rotter Smith. We have a vigorous review process.  It occurs every year.  We make adjustments in both annuity levels as well as contribution rates that active employee and employers have to pay every year, based upon the experience of the previous year.  The whole work of the actuary is to make educated assumptions about what they think is going to happen in the coming year and over a long period of time.  Then every year we review those assumptions against what actually happened.  Then we make adjustments going forward.  Every spring they review the experience as it affects retirees and we make adjustments to their annuities.  If investments were very good and we have a surplus of funds applicable to the retirees, they may see an increase in their benefits.  In bad years where there is a decrease in the annuity fund, they can see a decrease in their annuities.  That is where we have been for the past five years, decreasing the annuities.   We would hope that now that 2008 is behind us, next year as we go forward and SWIB has a good year this year, we hope to be getting back into paying out a positive adjustments next year.  It would be very modest, but at least it is on the positive side.

The contributions are done in June.  Now hopefully in the future, if we are able to improve upon our systems, we might be able to speed up that process.  We set the contributions rates in June so most local units of governments can have those rates in time for their budget setting.  The Board approves those rates in June.  The actuary reviews the assumptions we thought were going to happen in the year, reviewing the experience that actually did happen, and then making sure the rates reflect the amount that is required to fund the benefits that are actually being earned.  The contribution rates don’t fund the retirees who are already retired.  It is dealing with the active employees, and determining the amounts needed to fund what they are earning now.

How many people on average year retire?

In a typical year is between 8500 and 9500 people retire.   The year 2011 appears to have been an anomaly, we had about double that number, about 18,000.  We are also in the heart of the baby boomer.  This is the first third of the leading edge of the baby boom that is entering retirement age.  We expect those numbers to increase over time; 8500 – 9500 has been creeping up 2-3% per year normally.  We expect some growth over time.  That goes back to one of the challenges I discussed earlier.  We have a growing population of people we are expected to serve.  

What should everyone in the WRS know about their account or about the WRS?

The biggest thing for people to know is that the WRS is intended to be one piece of their retirement puzzle.  It provides a minimum floor benefit throughout their retirement.  It can go up, but it can go down.  Doing adequate planning, having additional savings, knowing what you’re getting for your contribution and what you’ll need on top of that. The big thing people need to know is their benefits, what it amounts to, and what it isn’t intended to cover.  Once of the challenges we face is getting more of a word out to active employees.  For so long we focused on the those people who are ready to retire; those people 2-3 years before retirement.  That’s too late in the game to be planning for retirement. We need to be reaching public employees earlier in their careers to be educating them about their benefits. Stressing the importance of having adequate savings in addition to their WRS account.  Getting them engaged in what their benefits mean to them over the long term.

Wellness Initiative and state employee smoking fee in the budget, how will they be implemented by your agency?

That is something we are still working on, it’s the Group Insurance Board.  They will be, over the next several months, engaging in how to implement those in a way that will carry out the desired intent.  It’s new territory, so a big piece of the challenge will be communication.  That’s the hard part about change, making sure people understand what is going on. What is and what isn’t going on.  We need to make sure they have the information they need to appropriately participate in these things.  That will be the big challenge for us, getting the word out.  We will need to work with different state agency employees to make sure they get the information they need to make good choices on these changes.

Below is some information that was sent out on the recent bonuses that the SWIB gave their investment board.  Hope this helps answer any questions you may have.

Earlier this week, the SWIB Board of Trustees approved incentive compensation for staff. Incentive compensation is part of the cost of investing the WRS fund. We pay competitive compensation to attract and retain competent professionals to manage your retirement funds. SWIB’s staff manages the trust funds for less money and the performance is better when compared to peer groups of 14 other large U.S. public pension funds, based on an independent study. Based on 2012 performance, SWIB awarded approximately $8 million in incentive compensation to staff.

 

 

I am attaching a handout that explains SWIB’s incentive compensation plan. In addition, here are some key points for you to help better understand and communicate this with your members.

 

1.       The 2012 investment earnings for the WRS trust funds were outstanding. With the support of SWIB staff’s exceptional performance, funds earned an extra $583 million above market returns.

2.       Incentive compensation strengthens the link between pay and performance. SWIB pays for performance. Incentive compensation is paid only when investment performance surpasses thresholds set by SWIB’s Trustees with the help of industry consultants.

3.       Incentive payments emphasize five-year performance to avoid excessive short-term incentives that were at the heart of Wall Street’s problems.

4.       SWIB is ranked as a low-cost pension fund manager that produces favorable returns when compared to its peers, according to two recently released independent reports.

Chris Preisler

 

Communications Specialist

State of Wisconsin Investment Board

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State of Wisconsin Investment Board: Compensation Overview

OVERVIEW

The objective of SWIB’s compensation plan is to recruit and retain the most capable professionals to manage and invest the trust funds.

• Qualified staff allow for lower-cost, in-house investing while maintaining strong performance to the benefit of taxpayers and WRS participants.

• SWIB competes for staff with investment firms throughout the country.

• Without qualified staff to manage the assets, SWIB must contract with expensive external managers for three times the cost to manage public market assets.

• About 70% of SWIB staff hold advanced degrees or professional certifications. One-third holds multiple degrees or certifications.

INCENTIVE COMPENSATION PAYS FOR PERFORMANCE

SWIB’s compensation remains below industry medians, but awards better compensation to staff who add value to the trust funds and allows for competitive hiring and retention.

• Incentive compensation must be earned and is paid only when portfolio and fund performance surpasses thresholds set by Trustees working with industry consultants.

• Incentive compensation is based largely on five-year performance to avoid excessive short-term incentives that were at the heart of Wall Street problems.

• Value added to WRS funds in 2012 by exceeding benchmarks totaled over $583 million.

COST-EFFECTIVE INVESTMENT MANAGEMENT

Compensation plan has allowed SWIB to increase in-house management from 20.7% of total assets in 2007 to 55% in 2012. In-house management allows for more effective cost-control and efficiency.

• The 55 percent of WRS assets managed in-house account for 15% of the investment cost while the remaining 45% under external management accounts for about 85%.

• Net cost savings from internal management is $40 million (based on cost of outsourcing public market portfolios), more than SWIB’s annual operating budget of $35.3 million.

• Using SWIB staff to manage public market assets costs about 1/3 that of using outside asset management firms for the same job.

EXCELLENT PERFORMANCE

According to Callan Associates, an independent investment performance consultant, Core Fund performance is above average.

• In 2012, the Core Trust Fund returned 13.7% and exceeded its one-year benchmark to earn an additional $574 million for that fund.

• Core Fund exceeded its benchmark for the one-, three-, five- and ten-year periods ending 12/31/2012.

Core Fund 20-year annualized return as of 12/31/12 was 8.3% (above the 7.2% assumed rate) and 30-year annualized return is 9.8%