Senate Sponsors: Daniel Biss and Bill Cunningham
Hearings: Executive Hearing, Feb 13 2013, 1:00pm Capitol 212 Springfield, IL
"Amends the General Provisions, General Assembly, State Employee, State Universities, and Downstate Teacher Articles of the Illinois Pension Code. In the General Provisions Article, creates a cash balance plan for new hires of the State Universities and Teachers' Retirement Systems and for certain Tier II participants. Increases the retirement age for certain Tier I members and participants. Changes the conditions of eligibility for, and the amount of, automatic annual increases for Tier I retirees. Increases required employee contributions for Tier I members and participants. Limits pensionable salary for Tier I participants. Changes the required State contribution to each of the affected retirement systems so that those systems are 100% funded by 2043. Guarantees certain funding levels. In the State Universities and Downstate Teacher Articles, shifts costs to local employers…"
Some people believe that cash-balance plans are “good deals.” I heard that TRS Executive Director Dick Ingram said a cash-balance plan was better for him than the current Tier II arrangement. Nevertheless, what I have read is that cash-balance plans are effective ways to significantly lower benefits for its employees.
A Brief History of the Cash-Balance Plan:
“The cash-balanced plan [that Cigna] implemented [in 1997] was initially developed by Kwasha Lipton, a boutique benefits-consulting firm in Fort Lee, New Jersey, as a way to cut pensions without making it obvious to employees… [Though] pension raiding became more difficult as Congress began implementing excise taxes on the surplus assets taken from plans [or in the case of Illinois, “diverted”], Kwasha devised the cash-balance plan as a new way for employers to capture the surplus” (Helen Schultz, Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, 2011).
“When companies convert their traditional pensions to cash-balance plans, they essentially freeze the old pension, ending its growth… [At Cigna,] 'employees didn’t realize that there was no actual ‘account’ receiving actual employer ‘contributions’ or ‘interests’ – just a frozen pension, with no leverage… From the beginning, the cash-balance plan’s ability to disguise the pension cuts was one of its selling points with employers… [In essence, it’s] a pension plan ‘masquerading as a defined contribution’ savings plan, like a 401(k)… [and it’s a way to disguise the cutbacks in benefits… Corporate America uses cash-balance plans to mask significant reductions… Short of outright theft of pension assets, employers have been fairly free to make a lot of self-interested decisions when it comes to managing pensions” (Schultz). (Read John Dillon’s Cash-Balance Plans).
“The alternative of trying to cut public employees’ retirement plans down to the private sector level… just ensures that most Americans [public employees] face a bleak old age” (Alicia H. Munnell, State and Local Pensions: What Now? 2012).
The following synopsis is from A Vanguard Commentary:
“[Indeed,] cash-balance plans are relatively common these days and may become even more so… Plan sponsors often look to the cash-balance design when the cost—and cost uncertainty—of their traditional pension plan has become unsustainable. Compared with the liability associated with a [defined-benefit] traditional plan, the liability of a cash-balance liability is more stable. Sounds like a good thing, right? Well, not necessarily. The liability for a traditional defined-benefit plan is easily matched by bond investments, making risk-reduction cheap and easy. This isn’t the case for most cash-balance plans…
“There’s another way to understand why cash-balance plans present a challenge when it comes to risk reduction. The beauty of a traditional [defined-benefit] pension plan is that it is a series of future payment promises, just like a bond. When one applies an interest discount to pension promises or bond promises, the value of the promises reacts in a similar way to changes in the interest discount rate. That’s why we can match traditional pension liabilities with bond investments. In a cash-balance plan, the projected interest crediting on the accounts offsets the interest discount as well as most of the impact of interest rate changes, leaving us with no interest rate sensitivity to match…
“Despite the variety of cash-balance plans with and without the potential to invest in matching assets, the typical cash-balance plan will find it difficult to minimize risk. In general, the path to risk reduction for a cash-balance plan is similar to that of a traditional plan. As funded status improves, risk can and should be reduced, and risk becomes more about matching assets than diversification. However, because risk reduction is costly (in the form of sacrificing expected return) and more difficult, riskier portfolios are likely to be maintained for longer periods and in more circumstances" (A Vanguard Commentary, 2011).
For the full report by R. Evan Inglis, chief actuary and Jeffrey Sparling, senior investment consultant at Vanguard, read “Investment strategies for cash balance plans—more risk than you thought”