STUMP » Articles » Wonkblog asks: Can Insurance Companies Save Public Pensions? » 22 September 2014, 14:40

Where Stu & MP spout off about everything.

Wonkblog asks: Can Insurance Companies Save Public Pensions?  

by

22 September 2014, 14:40

No.

Oh, all right, I will address the question in the title of this Wonkblog post:

Does it make sense for local governments to turn over the assets of their employee pension plans to insurance companies, who would in turn make monthly payments to retirees?

That is the idea at the heart of a bill touted by Sen. Orrin Hatch (R-Utah) for more than a year. On Wednesday, Hatch’s proposal, aimed at getting local governments and states off the hook for future pension liabilities, got a big thumbs-up from the non-partisan Urban Institute.

After reviewing the plan, the research organization gave the idea its top grade, saying it eliminates a troublesome financial risk for state and local governments, protects workers who change jobs frequently, and rewards young workers—all while providing a steady stream of income for retirees.

“Unlike any other plan I have seen, it really addresses the retirement security issue, the funding problem, and it provides incentives to allow employers to attract and retain a productive workforce,” said Richard Johnson, director of the Urban Institute’s Retirement Policy Center. “It is hard to balance those three objectives.”

Here is the problem: for all of my posts about alternative assets in public pensions (though those are troubling when they are a huge portion of the portfolio), it’s not the financial risks per se, or even the longevity risk, that has been killing public pensions, though those do contribute.

It’s that governments are great at promising, but not so great at putting money by to pay for those promises.

Because there’s goodies they want to buy RIGHT NOW!!!!!

Sure, we’ll pay you later for the service you give today, but hey! Let’s buy a stadium! And art museum! Hike up salaries!

Now, it looks like there’s more to the Hatch proposal than just foisting the pensions as-is onto insurance companies. Because insurance companies not only can’t take a 72% funded liability as per the accompanying graph:

They have to over-100%-fund any promises they’re making, and that includes putting in longevity trends and using much lower discount rates than public pension plans can get away with. That 72% funded liability would probably be a much lower percentage…. that would require a lot of money to top up.

I don’t think Hatch’s proposal is going anywhere, because it would whack a lot of pensions out there. As per John Bury, some pension plans can’t even cover those already retired, forget about those yet to retire:

THE PLAN BARELY HAS 50% OF THE ASSETS NECESSARY TO ANNUITIZE ONLY (YES ONLY) THE RETIREES WITH THE OTHER 475,000 PARTICIPANTS HAVING LESS THAN NOTHING.

That’s scary.

By the way, Bury was talking about the NJ teachers pension fund. They are going to be in a world of hurt once the asset death spiral starts. But that’s for another time.

Insurers are willing to write group annuities to back pension promises — they did this with GM and Verizon pensions — but you have to give them all the assets they require to back that business. A “fair price” would be less than what is statutorily required, probably, because statutory requirements tend to be very conservative in valuing the liabilities, in order to protect policyholders/annuitants. This is called surplus strain.

But the thing is, even with the “fair price”, governments would have to pay amounts way beyond what they’re paying now, just to meet the pension promises made for past service, forget about any future service accruals.

The main problem is that not enough money has been put by. The risk is not so much that public pensions across the country have been investing too riskily or anything like that (but overly risky investing can make the bad situation worse.)

Now, not all pensions are underfunded as grossly as New Jersey or Illinois. But you don’t get to a 72% overall funded ratio just from those two states.

While insurers might be able to reduce the worry about longevity risk and financial risk for fully-funded plans, they cannot help politicians trying to lowball pension costs.


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