Missouri
ISSUES
PUBLIC PENSION
2017
Missouri Local Government Employees Retirement System
A Secure Retirement For All
Executive Summary
We Believe in a Secure Retirement for All
Retirement security is an important building block for Missouri Communities.
Every hard working Missourian should be able to retire with dignity whether they work
in the public or private sector. Retirement security is an important issue in this state.
LAGERS understands this importance, and strives to ensure this security every day.
LAGERS is a defined benefit pension plan that serves over 60,000 current and former
Missouri local government workers. Defined benefit plans pay a retiree a protected, predetermined amount each month. The amount of the benefit is based on a formula, not an
account balance, and is driven by the employee’s years of service and salary. Defined Benefit
plans remain the most economical and effective retirement plans not only for employees, but
for employers and taxpayers as well. They provide a clear and secure path to retirement for
employees and help employers recruit and retain a strong, loyal workforce.
Public Pension plans return value to the communities as well. Approximately 93% of the
benefits are paid to retirees living in the communities they served as public workers. The
steady monthly retirement benefits received by these pensioners are not stuffed under a
mattress, but reinvested in their hometowns. LAGERS paid out over $266 million to 20,219
benefit recipients last year, with $244 million staying in Missouri. That’s a pretty nice annual
economic stabilizer for the Show-Me State!
This booklet discusses the issues surrounding Missouri’s
public pension plans. We trust the information contained here will serve as a guide to help you make decisions about public pension plans.
Missouri Pension Issues
Pensions Can Help Secure
Missourians’ Retirement Future
D
efined benefit plans have a long
provide the majority of the funding.
track record of success in the
In LAGERS, investment returns ac-
public sector and continue to be the
count for about 62% of the plan’s
plan of choice for state and local gov-
funding.
ernment workers.
fined benefit plan available to all of
A defined benefit retirement
LAGERS’ funding
policy requires
we strive to
LAGERS administers a de-
Missouri’s
vides a retiree with a pre-determined
except school districts. LAGERS is
benefit after meeting certain criteria.
a voluntary system that adds about
The main purpose of a defined ben-
15 new political subdivisions to its
efit plan is to provide income during
membership each year.
the retiree’s remaining years. Benefits
approximately 3,000 political sub-
are paid on a monthly basis and ex-
divisions in Missouri, nearly 700 of
tend until the retiree’s death. Benefit
which are currently participating in
amounts are often based on a retiree’s
LAGERS.
average working salary and the length
of the retiree’s employment.
required contributions are made to
A defined benefit plan is
the plan each year. Failing to collect
“pre-funded.” This means that a re-
the full contributions puts the plan at
tiree’s benefit is paid for before he or
risk of higher future required contri-
she reaches retirement.
There are
butions, a higher unfunded liability,
three sources of income to the plan,
and may affect the plan’s ability to
employer contributions, employee
make benefit payments.
contributions, and the return of the
RSMo 70.730 and 70.735 re-
quires we strive to promote intergen-
plan’s investments. Contributions to
quires that all of LAGERS participat-
erational equity and continue prog-
the plan begin when a worker is hired
ing political subdivisions fund 100%
ress in reducing unfunded liabilities.
and continue until the worker leaves
of their required contributions. Be-
Each generation of members and em-
employment. It is common in the
cause each subdivision is required
ployers should incur the cost of ben-
public sector for both the employer
to make their full contribution each
efits for the employees who provide
and the employee to contribute to the
month, every employer is working
services to their communities, rather
plan. The returns that are generated
toward and will eventually be 100%
than deferring those costs to future
from the plan’s investment portfolio
funded.
members and employers.
Missouri Pension Issues
political
promote
plan is a traditional pension that pro-
subdivisions,
intergenerational
equity and
There are
continue progress
in reducing
It is very important that the
unfunded
liabilities.
LAGERS’ funding policy re-
Pensions Are an Investment in Our
Communities
Incentivizes employees to
work hard and stay with an employer
during their most productive years
Attracts quality employees
A Defined
Benefit Plan...
Provides a dignified exit from
the workforce so that employees
can retire when they are ready
Keeps lines of promotion
open, allowing younger talent to
stay and grow within the employer.
A pension plan is a tool for public
employers to improve services
provided to their communities.
The pension provides a
mechanism to attract and retain
a skilled workforce to provide
the best possible service to the
citizens.
There are real consequences for
taxpayers when individual savers
fail to adequately prepare for
retirement.
LAGERS is:
Flexible
• Employers choose benefits based on local goals &
budgets
• Benefits can be changed either up or down
Portable
• Goal is to retain skilled workers
• Nearly 700 Participating Employers, 15 Join Each
Year
• Once a member is vested (5 Years), they are
vested at any LAGERS employer
• Lump sum option for members leaving local
government service with less than 10 years
Secure
• 94.7% Funded
• Required contributions & no delinquent employers
Missouri Pension Issues
The Unfunded Liability Nobody is
Talking About
Elizabeth Althoff, LAGERS Senior Communications Specialist
Y
ou hear a lot in the news
jor unfunded liability that nobody is
much they will need in retirement.
these days about a looming
talking about….yours.
pension crisis and their sup-
‘My unfunded liability?’ you
Institute on Retirement Security, 45%
posed mounting unfunded liabilities.
may ask. ‘I don’t have an unfunded
of American households do not own
When I try to imagine how I would
liability.’ And that is where many of
any type of retirement account, with
react to these headlines if I did not
you would be mistaken. Like most
a disproportionately large number
work in the retirement industry, I
Americans, you are probably plan-
of low-income households saving
imagine that the phrase ‘unfunded
ning to retire at some point in your
nothing for retirement. Even more
liability’ would sound absolutely ter-
life – either at a time of your choos-
shocking, of households that do have
rifying, and that if I ever heard that
ing or perhaps for reasons beyond
retirement savings accounts, the av-
phrase being thrown around when it
your control, such as failing health.
erage balance for individuals near-
came to my retirement plan, I would
And when that time comes, you’re
ing retirement (age 55-64) is a mere
be concerned. going to need to have income to live
$104,000; and if we included the
According to the National
Until we start quantifying the unfunded liabilities in 401(k)-type
plans, many Americans are going to be in for a big surprise
when they are ready, but cannot afford to retire.
off of for the rest of your life.
households that are saving nothing,
that every pension plan should have
In order to be able to quit
that average drops to just $14,500
sound plan design with a solid fund-
working or to reduce your work
saved by those who are at the door-
ing policy, so that, like LAGERS (and
hours in retirement, you need to be
step of retirement.
many other well-run pensions across
saving every month to ensure your
the county), the benefits are being ful-
nest egg will be large enough to
cans will be facing their own un-
ly funded today and plan participants
sustain you for the rest of your life.
funded liabilities at retirement, and
can go to work and retire with the
Savers (especially those without pen-
that presents a big problem. If I’m
peace of mind in knowing that their
sions) who fail to set aside enough
an average saver with $104,000 and
retirement will be secure. Pension
money each month for their retire-
I need to draw out $1300/ month to
plans that are not doing this should be
ment are creating a huge personal
survive in retirement, my savings
fixed. But what I find most disturbing
unfunded liability – a gap between
would not last 7 years…and that’s not
is that there appeared to be one ma-
how much they have saved and how
even taking into account inflation or
Now to be clear, I believe
Missouri Pension Issues
This means that most Ameri-
any unplanned expenses (such as a big
what are we going to do?
that often still requires some addi-
medical bill). If I live 20 years into re-
It seems to me that many are
tional personal savings, their pension
tirement, I need to have saved at least
suggesting that the solution to these
is the foundation of their retirement
$312,000; and if I live 30 years, I bet-
pensions’ unfunded liabilities is to re-
security, and it’s one they can count on.
ter have $468,000 in the bank. Since I
place them with even bigger personal
only have $104,000, I have a personal
unfunded liabilities by forcing people
to defined contributions plans (e.g.
unfunded liability of over $360,000.
to plan for retirement on their own.
401(k)s) may indeed seem like a simple
While granted, my math is simplified,
Pensions that have sound plan design
fix to all the mounting pension head-
take that average times the estimated
and solid funding policies work, and
lines, but until we start quantifying
80 million people who will be retiring
they work well. They don’t pass cost
the unfunded liabilities in individual
over the next twenty years and you get
onto future taxpayers because the li-
retirement plans, many Americans are
upwards of 30 trillion dollars in un-
abilities (benefits) are pre-funded,
going to be in for a big surprise when
funded liabilities in Americans’ per-
and participants can take advantage
they are ready, but cannot afford to re-
sonal defined contribution accounts.
of longevity risk pooling and profes-
tire.
sionally managed investments. And
I can’t help but think to my-
self, “What is going to happen when
while LAGERS members receive
these folks can no longer work? What
only a modest
are they going to do when they cannot
mont h ly
afford to retire?” As we usher out
benefit
The switch from pensions
the era of private pensions,
what is going to happen
as more and more individuals enter retirement without adequate
savings and with
a huge personal
unfunded liability? What is going
to happen when they
lose their home because they can’t make
the mortgage payment, or go without
food to be able to afford their medication?
As a society and as taxpayers,
Missouri Pension Issues
Pension Plans Invest More Efficiently
Than Individuals
D
efined benefit plans tend to in-
62 cents of every dollar
vest pragmatically, looking to
a retiree receives is paid
the long-term and engaging in pru-
for from the investment
dent investment practices.
returns of the LAGERS
LAGERS is accomplishing
portfolio.
this by collecting contributions from
employers and employees and then
investing those funds in a diversified
portfolio. Returns from these investments compound over time and provide the majority of funding for the
plan.
Asset allocation decisions
are made by LAGERS’ trustees who
have a fiduciary obligation to ensure
the participants’ funds are invested
prudently. The trustees rely on recommendations from professionals to
help aid in making their decisions.
Public pension plans, depending on
their size, often have an internal investment team consisting of a chief
investment officer and an investment
staff that hire outside firms to manage portions of the portfolio to help
aid in producing the best possible results for plan participants.
Defined
benefit
pension
plans tend to earn higher returns on
their investments than individuals
earn in their private accounts. This
is for a few reasons. One is that pension plans have an infinite time horizon on which to base their asset
Missouri Pension Issues
allocation. An individual typically
investors. This allows the plan to di-
adjusts their asset allocation based
versify its asset base and create an
on their current stage of life. For in-
additional amount of return for an
stance, someone nearing retirement
overall lower amount of risk. The av-
may decrease their portfolio’s risk by
erage individual usually has no ability
adjusting their allocation to mainly
to negotiate with the firms setting the
consist of fixed income assets (i.e.
expense for their investments. Most
bonds) which would produce a lower
investments also have a minimum
return. A 25 year-old that just started
investment size which can deter indi-
their career can take on more risk
vidual investors from getting the best
by having a portfolio mainly of eq-
diversified portfolio.
uity assets (i.e. stocks) and produce a
higher return. Since the pension plan
plans’ returns tend to be higher than
is investing for the average individual
individuals’ is because the pension
and not just one person, it can create
fund hires professional investment
an asset allocation to optimize the re-
managers to manage the portfolio’s
turn for a given level of risk. There-
stock selection and asset allocation.
fore, continuing its course of seeking
Typical working class Americans
the best returns for its participants
generally have little knowledge of the
into perpetuity.
investment landscape and may have
The level of risk for a pension
no interest in learning more. LA-
plan is mitigated by its ability to con-
GERS works with investment profes-
solidate its assets into one large pool,
sionals which gives participants one
giving pensions the ability to negoti-
less worry and allows them to focus
ate lower fees and invest in assets that
on serving their communities.
are not accessible to most individual
Another
reason
pension
LAGERS Uses an Appropriate
Assumed Rate of Return
A
discount rate is the interest rate
to ensure level contribution rates as
into the fund from investment return.
pension plans use to calculate
well as making sure there is enough
the current value of future retirement
investment income to cover future
fund has a high discount rate of 9%.
benefits.
liability shortfalls.
The investment
Initial contributions would be low be-
money is needed today to be able to
income matters, as investment earn-
cause the plan is expecting a high re-
pay future benefits, which in turn is
ings account for a majority of pension
turn on investments. But, over time, if
one factor in determining the contri-
funding. A shortfall in long-term ex-
the pension fund’s investments do not
bution rates required from employers
pected investment earnings must be
return 9%, contributions would have
and employees.
made up by higher contributions or
to increase in order to pay for the ben-
This tells you how much
Now let’s assume a pension
reduced benefits.
efits.
The most important
thing to understand
at an appropriate assumed rate of re-
arrive at an appropriate
about a discount rate
turn is of utmost importance so that
assumed rate of return is of
and assumed rate of re-
contributions may remain level for de-
turn is that ultimately,
cades, helping to ensure the taxpayers
utmost importance so that
the pension fund’s ac-
of today are charged as appropriately
contributions may remain
tual return on invest-
as the taxpayers of tomorrow. In other
ment
words, the end result should create
The process chosen to
matters
much
The process chosen to arrive
level for decades, helping
more than the discount
generational fairness.
to ensure the taxpayers
rate and the assumed
rate of return.
discount rate of 7.25%. This is based
Here is an example.
on an asset liability study that incor-
Let’s say a pension fund
porates capital market assumptions
assumes a low discount
and liability projections for the future.
rate of 4%.
Initially,
As of 2016, LAGERS’ 20 year return is
the contributions re-
7.80% and its return since inception is
quired from employers
8.50%. LAGERS is very comfortable
The assumed rate of return is
and employees would be high because
with its assumptions and the contri-
the return that a pension fund plans to
the fund expects only a 4% return
bution rates charged to employers and
receive on its investments and is deter-
on investments. But over time, the
members and performance and ex-
mined by using a set of assumptions to
fund’s investment returns exceed a
perience is evaluated every five years
project future investment returns. The
4% return, and so, the contributions
to ensure the appropriate figures are
discount rate and assumed rate of re-
required will decrease because more
being used to maintain a financially
turn are one in the same which helps
money than expected is being poured
stable pension fund.
of today are charged
as appropriately as the
taxpayers of tomorrow.
LAGERS uses an appropriate
Missouri Pension Issues
Consequences of Switching from a
Pension Plan to a 401(k)-Type Plan
Pension
reform
like they should in the 401(k)-type
bution plan participants in the study
h a s
plan. In fact, there were 1,767 West
reported that they had received a lump
been a popular topic in recent years
Virginian teachers over the age of 60 in
sum distribution from their plan prior
and some of that discussion has fo-
2005. Only 105 of them had account
to age 55, compared to only one out
cused on eliminating defined ben-
balances over $100,000 for retirement.
of ten of those with a defined benefit
efit pensions and transitioning public
Hardly enough to allow them to retire
plan.
workers into a 401(k)-type defined
and maintain their standard of living.
contribution plan. While it is always
Another study by the Boston
that rely on non-annuitized DC plans
good to look into ways to be more ef-
College Center for Retirement Re-
as their sole source of retirement in-
ficient and improve the financial con-
search found that defined contribution
come are likely to be demonstrably
dition of pension systems, switching
plan features are linked to retiree pov-
worse off [than those studied in this
government workers from a defined
erty.
report],” the authors wrote.
benefit pension plan to a defined con-
tribution plan will ultimately hurt the
DC plans will require future retirees
DB to DC hurt workers, it also costs
retirement security of workers and be
to negotiate their way through a mine-
more. Employers who have made this
more costly to governments.
field of challenging decisions that may
move cite cost as their #1 reason for
reduce retirement income,” the authors
moving to a DC plan. This is often be-
tional Institute on Retirement Se-
of the study wrote.
cause they are not providing the same
curity (NIRS) examined states that
The research found that de-
level of benefit. Another recent NIRS
have transitioned from defined ben-
fined contribution plan features like
study found that DB plans have a 48%
efit pensions to defined contribution
pre-retirement lump sum withdrawals
cost advantage over DC plans to offer
plans. The study found that these
and limited options for steady month-
an equivalent benefit.
states experienced increased retire-
ly income in-
ment plan costs and increased plan
creased
underfunding.
risk of retirees
from
A recent study by the Na-
West Virginia, one of the
“The transition from DB to
the
these
states studied in the report, switched
plans becom-
to a 401(k)-like plan in 1991 only to
ing financially
switch back to a defined benefit pen-
insolvent. For
sion 2005. Why? The state found
example,
that the costs were lower for the DB
out of five de-
plan and employees were not saving
fined
one
contri
Missouri Pension Issues
“Workers in future cohorts
Not only does the move from
“The transition from DB to
DC plans will require future
retirees to negotiate their
way through a minefield of
challenging decisions that
may reduce retirement
income.”
—Boston College Center for Retirement Research
Funded Percentage, Unfunded Accrued
Liability, and Employer Contributions
Every
pension plan’s
inflation, and other data important to
Employer Contributions
goal is to be
pension plans.
100% funded. That is when a plan’s
The amount an employer
must pay to fund its pension plan
assets are equal to its liabilities. A
Unfunded Liability
is often called the annual required
pension plan that is not 100% funded
When a plan is not 100%
contribution, or ARC. The ARC has
is not necessarily in danger so long as
funded, that means that its actuarial
two components, the first of which
it has a sound funding policy and re-
accrued liabilities exceed its assets.
is called the normal cost. This is the
ceives its full contributions each year.
When this happens, an unfunded ac-
cost for retirement benefits for cur-
crued liability is created, which is the
rent year.
Funded Percentage
difference between the accrued liabil-
is the supplemental cost, sometimes
LAGERS is currently 94.7%
ities and the assets on hand. The exis-
called prior service cost, or the un-
funded. The funded percentage of a
tence of an unfunded accrued liabil-
funded accrued liability cost. This is
pension plan is its assets divided by
ity is not necessarily a problem. The
the portion of the ARC that is used
its liabilities. A plan’s assets are the
amount of this liability is amortized
to cover the amortized unfunded ac-
sum of the contributions it has col-
over future years by the plan’s actuary
crued liability payment.
lected plus the returns from the plan’s
and paid for by contributions and in-
investments.
vestment return over time.
Liabilities, officially
The second component
called, “Actuarial Accrued Liabilities”
are the present value dollars of plan
promises to pay benefits in the future
LAGERS’ Unfunded Accrued Liability 2009-2016
allocated to employee service that has
$892 million
already been earned. A liability has
been established (“accrued”) because
$831 million
the employee has earned service, but
the resulting monthly cash benefit
may not be payable until years in the
future. Accrued liability dollars are
the result of complex mathematical
calculations, which are made by the
plan’s actuary. An actuary is a person
$351 million
who is trained in statistical analysis of
life expectancy, market expectations,
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Missouri Pension Issues
Missouri Local Government Employees Retirement System
2017 Missouri
PUBLIC PENSION ISSUES
701 W. Main St. P.O. Box 1665
Jefferson City, MO 65102
(800)447-4334
molagers.org
lagersbloggers.org
[email protected]